11/09/2004

Outsourcing

One of the bloggers from Marginal Revolution and another economist had a debate set up by the Wall Street Journal about outsourcing. We all know that outsourcing is a controversial subject. But it all depends on how we look at it. For one, in certain industries, it is not just a matter of being cheap and wanting higher profits by cutting labor costs. For some, it is a matter of staying competitive and surviving.

If we take a look a the situation through partial equilibrium analysis we conclude that outsourcing causes unemployment. Yet, in general equilibrium analysis we consider the interdependence of all factors in the economy. Take the example of a production worker who makes cars loses his job as his company sends labor overseas. Without looking at the whole picture we conclude that outsourcing causes unemployment. But let's consider that the country where the car manufacturer moved production imports steel from the U.S. By looking at the big picture we can see that demand for labor in the car industry went down and the demand for labor in the steel industry went up. Not only that, the price of cars goes down and many people can benefit.

Check out the debate. It was interesting.

4 comments:

Anonymous said...

I agree with Peter that by looking at the whole picture, you will recognize the benefit of outsourcing cars to other countries in return the increase in jobs in the steel industry. One problem that may need to be considered would be what happens to those who specialize in the automobile industry, but don't have the skills to work in the steel industry?

Ernie said...

I think that outsourcing is a good thing if you do indeed look at the big picture. It makes sense when you take a look at the automobile/steel example. It is tough to have anyone lose a job, but in an economy that takes into consideration millions of jobs and not just a single job, one must agree at least in-part with outsourcing.

Dr. Tufte said...

I think you've all gotten the point that outsourcing is probably a good thing. That's nice to see...

One thing that rarely gets discussed in these things is why workers don't insure themselves against being outsourced? I know that they just can't go out and buy a policy to cover this, but they can save their money and invest it. In media coverage they always seem to find someone who has worked for the company for ever, lost their job, and has little or no savings. You don't see all the people who saw this coming, prepared, and got out.

For example, it isn't precisely outsourcing, and I'm not claiming that these are the most brilliant guys out there, but both my father and brother saw in middle age that their jobs were not likely to be sustainable, and they prepared themselves and successfully bailed out. This is not the case with everyone, but I think there is a serious underrepesentation of people who successfully deal with being outsourced.

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