Outsourcing is when American companies close plants in the U.S. and open new factories overseas. Jobs which were formerly done by American workers for high wages are now done by foreign workers for low wages.
Outsourcing has effected many industries. Much of the manufacturing in the world is now done in China where factory workers make less than $1 per hour, receive no benefits and have few rights. U.S. workers are paid $20 to $50 per hour for the same work, plus benefits that can add 50% to the cost of labor.
Manufacturers like Ford and General Motors have all shut down plants in places like Michigan and Ohio and now build cars in China. Everything from cars to furniture to apparel and shoes to electronics is manufactured overseas and shipped to the U.S. on massive container ships that are unloaded at the Ports of Los Angeles and Long Beach.
And it is not just manufacturing. Service jobs are outsourced to countries like India because the people there are highly educated and speak English fluently, sometimes better than Americans, while Indian wages are a fraction of U.S. wages. An American engineer might make more than $100K per year while his Indian counterpart in Asia may earn less than $20K per year.
All kinds of jobs such as design engineering, computer software, medical diagnosis and photographic retouching that require skill and training can be performed by workers in Asia on the cheap.
Even Hollywood has been affected. The film industry term for outsourcing is “runaway production”, which has been a “reality show” in Los Angeles since the early 1990s. Many Hollywood movies are now filmed in Prague at Barrandov Studios or some other Eastern European country like Bulgaria or Romania where wages are low compared to the U.S.
The Paradox
Firms benefit from to outsourcing because it reduces labor costs. It makes sense for profit-driven firms to reduce production costs because it increases the bottom line which is profits to the owners. For public companies, increased profits also tends to raise the stock price, which is the value of the firm in the market place.
But a problem arises when many U.S. companies fire U.S. workers and send the jobs overseas. Unemployment in the U.S. will be high and many workers find themselves without a paycheck. Since those workers have no income, they can’t afford to buy the goods from the very U.S. companies that sent their jobs overseas. The result is a recession with consumer spending way down and corporate revenue way down. In the short term, corporate profits may rise because of reduced labor costs. But there won’t be growth in sales because households have less money to spend.
This is the situation in America today. All the manufactured goods that fill the shelves in Walmart and Target come from China. But the unemployment rate in the U.S. is around 17%, which works out to about 20 million unemployed workers, leaving households without a paycheck and money to buy consumer goods.
Thus the paradox. Outsourcing is good for each company individually, but is bad for the country overall. Companies can cut labor expenses, but by doing so they cut their customer’s income which is the source of their revenue. In a sense, the companies have cut their own throats by outsourcing so many jobs.
