The Impact of Outsourcing on the Nation’s Economy

Introduction

Outsourcing is the strategy largely utilized by the companies, and it has proven its effectiveness. The discussed strategy enables companies to increase their capacities and simultaneously spare in the financial aspect. However, the contemporary outsourcing activities of private and public sectors with regards to pragmatic and ideological perspectives resulted in the loss of $118 billion revenue, reduction of employment opportunities and subsequent loss of employment income. Therefore, the impact of outsourcing on the nation’s economy may be quite damaging.

Now, both unemployment and poverty rates in the USA can be explained by the effects of the last economic crisis that has seriously harmed the country's economy. However, the crisis is not the only economic problem that the country continues to experience. The process of globalization that provided the country with numerous economic benefits appeared to have serious drawbacks. Globalization caused the rise of so-called outsourcing when production started being moved to other countries in order to minimize costs. However, the outsourcing of manufacturing jobs led to practically real decline of the U.S. industrial production that in turn caused the rise in unemployment.

Body

It is to be emphasized that outsourcing demonstrates a clear conflict between interests of corporations and interests of the entire society. That is because outsourcing often tends to be beneficial to companies that move production to developing countries where they can enjoy the abundance of cheap labor as well as less strict work safety regulations. As a result, companies that agree on outsourcing have a perfect opportunity to reduce their costs and maximize profits without harming their competitiveness that is one of the main purposes of business. However, it is not beneficial to the economies that are going to lose jobs due to outsourcing. For instance, the U.S. economy started experiencing the process of deindustrialization and destruction of jobs for many “blue-collar” workers that have to look for new jobs, the number of which, however, does not tend to grow significantly. Certainly, outsourcing also means a decline in production of some goods, including food products, equipment, textiles, metal and others.

Total economic losses from outsourcing are undeniably great. The share of American companies that applied outsourcing nearly doubled from 12.4% in 1987 to about 22.1% in 2002 (Kehal & Singh, 2006). Outsourcing was responsible for the decline in industrial production. It employed more than 18 million workers in 1989 but only about 15 million in 2003. The most significant decline in production affected U.S. manufacturers of electronics, textile, apparel, vehicles, products made of plastics or rubber, as well as chemicals and machinery. Totally, industrial production decreased by almost 10% between 1987 and 2002 (Brinkkemper & Jansen, 2012). All these jobs that were done by Americans eventually were entrusted to foreign workers.

Workers that theoretically are supposed to find other more effective jobs often cannot find them and remain jobless. Certainly, being jobless, such people do not create material wealth and have practically no money to purchase goods, services and pay taxes, and thus promote the economic prosperity of the entire society. Outsourcing of manufacturing jobs often undermines purchasing power of the U.S. consumers. That happens not only because some workers become jobless; outsourcing also results in lower wages for those who have saved their jobs. As the American economy strongly relies on wealthy consumers, such changes are harmful to a stable economic growth (Ashley, 2008). Moreover, outsourcing increases the risk that the country might suffer from the spillover effect because valuable knowledge can be used in other countries resulting in the loss of significant competitive advantages. Despite the fact that in some cases outsourcing might be beneficial to the entire economy, it often creates benefits only to shareholders or CEOs of companies while the country is to face consequences.

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Manufacturing is a great job multiplier because even one new manufacturing job leads to the creation of few additional jobs in other industries and services, such as extraction or transportation. Besides, the manufacturing sector is responsible for the greatest share of spending associated with research and development. That means that the decline of the industrial production weakens its positive effects on the U.S. economy. That means that if, for instance, one manufacturing job is lost, obviously, other related jobs are likely to be eliminated as well. Certainly, in such conditions, there are also reasons to believe that the decline of industry might result in a decreased financing of research and development, considering the role of the manufacturing sector in this area. As a result, it becomes logical to claim that outsourcing of manufacturing jobs contributes to the U.S. economic downfall.

As a result, because of the previous popularity of outsourcing, the U.S. economy is not able to make use of all its competitive advantages, including those that it has managed to regain recently. Unfortunately, outsourcing has resulted in a rather absurd situation when the United States cannot regain its positions quickly despite the fact that China, which is one of the most famous outsourcing countries, shows rapidly growing wages losing the advantage. While such issues can be resolved successfully, this process is going to take additional time, during which the economy will obviously suffer from lower growth due to the lack of some valuable resources, such as skilled labor force. It is also to be remembered that new methods of extraction of natural gas allowed the United States to enjoy lower energy costs.

Saving money is usually one of the main reasons to outsource. Number of costs consumers and companies can save by outsourcing depends on the areas they are looking to outsource (areas with assets, such as IT and real estate, generally garner more savings) and how big those areas are within an organization (a company can usually save more by outsourcing the work of 500 people rather than 50) (Willcocks, Cullen & Craig, 2010). In addition, cost savings are realized in several ways. First, a person may own all the resources and has to pay for their acquisition and maintenance. These costs are usually fixed and occur no matter if a person uses the resources or not. Second, companies doing the outsourced work can also save money. The savings in salaries can be significant. Moreover, consumers pay more than they should for all goods. Thus, if there is no decline in the consumer buying power, the costs saved by companies is much greater.

Conclusion

As a conclusion, it is to be emphasized that outsourcing has truly contributed to the economic downfall of the USA. While outsourcing might be beneficial sometimes, it is mostly harmful, but companies that apply outsourcing tend to take into consideration only their profits. Outsourcing has not only resulted in an increase in unemployment, but has also reduced positive effect of the job multiplier as fewer manufacturing jobs generate smaller effect. The long-term impacts of outsourcing might be even more serious because the economy is deprived of valuable resources. The United States still cannot regain lost manufacturing jobs because the current labor market cannot offer enough specialists and new equipment is a problem as well. Outsourcing deprived the U.S. economy of the ability to make use of all its economic advantages such as low energy costs. Therefore, it can result in a slower economic growth.

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