September 30, 2010

Outsourcing, is it really a bad thing?

By forcing the allocation of jobs, just as any good or service, and not allowing the free market to dictate the equilibrium, one of two things will always happen: an excess of quantity supplied or an excess of quantity demanded. To simplify: unemployment will occur or businesses will have to downsize or shut down.

In the case of the Senate bill, which gives tax cuts to companies who prove they’ve hired an American replacement, should not have any long term effects on market equilibrium. In the short run, it will create an incentive for companies to acquire tax cuts from hiring American workers. However, the amount of money to be saved from outsourcing the production of goods or services will outweigh the benefits of hiring expensive American workers in order to gain a break on payroll taxes.

By luring jobs back to the United States, as the article suggests, we notice the behavior portrayed by U.S. companies as a result of more jobs will be to hire less Americans and eventually revert back to outsourcing (once again reaching market equilibrium). One should never force the allocation of anything in the free market: jobs, goods or services. Notice in a simple supply-demand graph, an excess of supply (or workers) results from shifting the equilibrium point toward, what seems, a more desirable situation (ie, more jobs). This excess represents American workers who are unable to get hired by these companies because they simply aren’t competitive enough to compete with outsourced workers. The result from our tool, represents a situation by which the quantity supplied (workers), exceeds the quantity demanded (company demand for workers). This simply results in unemployment.

1 comment:

Larry Eubanks said...

This is an issue that, conceptually, would benefit by thinking about the economics of location. Why do businesses choose one location or another for any of their activities? Obvious answer to an economist is that businesses make location decisions, like an other decision, in an effort to maximize profit.

The policy issues around outsourcing jobs seem to me to imply an implicit assumption is being made, i.e., the cost of hiring an employee differs from one location to the next.

It seems to me if a statute is passed that reduces the cost, at the margin, of hiring an employee at a location within the boundaries of the U.S., then it is easy to predict at least a few more "jobs" will be located within the U.S.

Conversely, if in the past employers choose locations outside the U.S. for hiring some new employees, it is likely than at least in some cases this is because a relatively higher wage must be paid within the U.S. If we wonder what causes higher relative wages in the U.S., at least some of the explanation is undoubtedly government policy. And, thus the proposed law is very likely in effect seeking to removed the undesired (by this Congress) consequences of past laws and regulations. Ironic, eh?

By the way, I've mentioned I'm trying to avoid normative issues and statements. I believe you write about it is always "bad" to do something. That is normative. I would like to avoid such conversations. And, in my comment here, I'm trying not to judge "good" or "bad" as a normative economist typically would, but instead I point out that it seems likely the law in question seeks to remedy consequences of past actions by government that do not suit the fancy of those in government now.