OUTSOURCING A Problem? What kind?

Definitions Merriam-Webster Dictionary : “the practice of subcontracting manufacturing work to outside and especially foreign or nonunion companies” Updated: Not just manufacturing, now more often services, IT Outside but domestic as well as foreign - including “runaway shops” Nonunion or union Government as well as private sector

Domestic Outsourcing: Example University of Texas at Austin -Fires its own janitorial workers -Contracts to an outside firm to provide janitorial services -Those workers have lower wages, fewer benefits -Those workers are non-union -Those workers have fewer on-the-job protections -Those workers can be reorganized to intensify their work

Offshore Outsourcing: Example #1 Older notorious example in manufacturing General Motors in Flint, Michigan Closes 11 plants Fires 40,000 unionized workers Opens new plants in Mexico non-union, brutal repression of efforts to unionize Showcased in Michael Moore’s film Roger & Me Images of boarded up homes and businesses Interviews with fired workers Ducked by GM CEO Roger Smith

Offshore Outsourcing: Example #2 More common contemporary example Dell Computer Co. Call Centers –Fires a bunch of its own technical assistance workers in Austin, Texas –Hires a bunch of new technical assistance workers in India –Customer phone-in requests for technical assistance are re-routed to India –Workers in India paid lower wages, have fewer benefits –Dell’s costs are reduced, profits rise.

Government Outsourcing Example Current notorious examples in government US Government, Department of Defense –Invades Iraq –Instead of mobilizing internal military resources, –DoD gives non-competitive contract to Halliburton to provide meals to soldiers in the field, and hires mercenaries to torture Iraqi prisoners.

Reason for Outsourcing Primary: reduce costs –Cheaper labor, products, services or government imposed costs such as taxes or environmental controls –Reduced costs in private sector means higher profits Cost reduction via outsourcing –Outsourced reduced wages, benefits, safety –Reduced cost of services generated by such labor –Cheaper than internal generation of new kinds of labor skills and capabilities

Outsourcing & Consumption Reduced costs may, or may not, be passed along to consumers in the form of reduced prices –Depends on impact on profits Reduced prices might give larger market share Price fixing can keep prices high so lower costs only benefit profits Domestic Outsourcing that lowers wages & benefits reduces domestic consumption directly Offshore Outsourcing that raises employment and/or wages overseas raises consumption overseas

Objections #1: Outsourcing causes increased unemployment #2: Outsourcing causes reduction in wages & benefits #3: Outsourcing provides private corporations with a means to escape government regulation #4: Outsourcing provides private corporations with a means to escape taxation #5: Reduces incentives for raising productivity

#1: Increased Unemployment? - I Domestic outsourcing may, or may not, increase domestic unemployment. Offshore outsourcing usually expected to increase domestic unemployment and offshore employment –Might increase domestic employment depending on secondary effects, e.g., use made of increased profits, impact on international trade. –Poor data to judge the size and net result of opposing effects

#1: Increased Unemployment? - II Has become an issue in presidential campaign amidst current “jobless” recovery John Kerry has attacked offshore outsourcing as resulting in fewer US jobs, proposed countermeasures Bush Administration, through Gregory Mankiw, has: 1) Downplayed outsourcing as source of unemployment 2) Defended outsourcing as variation of trade Size of Effect on Employment? Large in absolute terms Small in relative terms

#1: Increased Unemployment? - III Absolute terms? –Cutting Edge Information says value of offshore outsourcing was $350 billion in 2003 and growing –Forrester Research says 3.3 million service sector jobs will be moved off-shore by 2015 –Another study says 14 million service jobs vulnerable Relative terms? –January 2004, US had 108 million service sector jobs –BLS estimates US will have 130 million by 2010

#2: Reduction in wages & benefits? - I Domestic Results –Reduction due to firings –Reduction due to substitution of jobs with lower wages and lower benefits for better jobs Whether jobs of new workers, or New, less compensated jobs for old workers –Reduction due to fired workers taking lower paid jobs with fewer benefits (Mankiw denies this in Economic Report of the President) –Reduction due to acceptance of lower wages etc by workers afraid of being the next to be replaced

#2: Reduction in wages & benefits? - II Offshore Results –Possible increases in local wages and benefits –Increases due to increased labor demand Direct in affected labor market Indirect as a result of increased demand

#3: Avoidance of government regulation Avoid environmental restrictions Avoid hours & wages laws Avoid OSHA restrictions Avoid unions and labor rights generally –Above issues key in debate over NAFTA –Avoid restrictive laws –Avoid enforcement of laws (bribes, etc.)

#4: Avoidance of taxation Kerry Campaign issue: –“close tax loopholes that make it profitable for corporations to move overseas” –“unpatriotic practice of U.S. corporations moving offshore simply to avoid paying their fair share of our nation’s tax burden” (August 2003) –Little data on degree to which this occurs

#5: Reduces incentives for raising productivity Outsourcing for cheaper labor supply reduces cost of labor vs. cost of capital Shift in relative factor costs shifts relative factor use Lesson of Keynesian period: if business is forced to pay more for labor it will be led to substitute capital for labor and raise productivity If business can escape to cheaper labor, that incentive is reduced

Historical Perspective - I “Outsourcing” – understood broadly – has been around throughout history of capitalism; it’s not a new phenomenon Mankiw is right that offshore outsourcing is very much like trade. It’s also like immigration. British “outsourced” their supplies of raw materials by getting cotton from US and later Egypt for textile industry US cotton plantation owners “outsourced” their labor by enslaving Africans

Historical Perspective - II Attitudes depend on circumstances, protests grow in difficult periods Before protesting “outsourcing”, workers protested: –Uncontrolled waves of immigration ( s) –Runaway shops of multinational corporations ( s) –Apartheid and brutal labor conditions overseas (1980s) –Offshore sweatshops ( s)

Outsourcing Viewed from the Top Outsourcing reduces costs to firms Outsourcing increases efficiency Outsourcing increases flexibility and adaptability Offshore outsourcing requires free trade Offshore outsourcing requires free capital mobility Offshore outsourcing, like trade and competition generally, is good for both country of origin and country of new source

Outsourcing viewed from the Bottom Outsourcing raises costs to workers Increased efficiency and flexibility for firms means greater risk, uncertainty, anxiety, stress and ill-health for workers “Free trade” facilitates pitting weaker workers against stronger workers through substitution of foreign for domestic production “Free capital mobility” facilitates disinvestment to undercut workers, 1 st at home, later abroad Offshore outsourcing pits workers in one country against workers in other countries. “Competition” is euphemism for pitting workers against each other, whether domestically or internationally.

Policy Conclusions For business: –Do not restrict outsourcing or penalize companies for outsourcing, either domestically or internationally For workers: –Short run: Domestic policy: minimize costs to workers –E.g., advance notice, full compensation, business as a whole should cover retraining and relocation costs (some of this in Kerry Campaign) –Long run: No domestic solution, which implies: organize internationally (like business) to achieve “leveling up” instead of “leveling down,” as a step in moving beyond the endless subordination of life to work and the pitting of people against each other characteristic of capitalism.

-End?- These slides were prepared by Professor Harry Cleaver, Department of Economics, University of Texas, Austin, Texas. He can be reached at