Unemployment is high yet skilled people are in short supply

In an article entitled The great mismatch, the author suggests that employers from rich nations are now hiring freelance workers from developing countries due to a lack of quality skilled labor in their local job market. Several benefits these employers derive from outsourced labor are: lower wage expense, flexible staffing, and higher quality work.

My close friend builds websites for a living. He called me today suggesting that he plans to stop building sites using local labor and start using freelance labor from India for a fraction of the cost. He feels that the savings derived from using freelance labor will allow him to lower the cost of his services and increase his profit margin.

What economic results are likely to occur in the local economy when he spends more money personally from increased earnings but removes jobs from the local market? How does the market compensate?


Jeremy said...

With the increase in profit margin, your friend will have the opportunity to spend more money. When looking at own-price elasticity, and relating it to the income elasticity of demand, an increase in your friends income could effect quantity demanded. As mentioned in our book, all things equal if a buyer's income rises by one-percent how will that change effect demand?

It seems like certain things are more income elastic than others. Necessities tend to be less affected by rises in income as compared to discretionary items. So, as to what will happen to the economy as your friend spends more money, it seems that he will be spending that extra money on things that are not needed, but wanted. So there would be a change in the quantity demanded for him with regards to things that he wants, rather than needs.

Dr. Tufte said...

I would take off a point on this in later blocks for a poorly formatted hyperlink.

This is a very cool question, with a surprising answer.

From a macro perspective, in the short-run, the answer is that not much will change. Your friend will presumably still be bringing in the same amount of revenue. Before, almost all of this would have been recirculated into the local economy. Now, somewhat less will be recirculated into the local economy. But, given that his overseas costs are going to be fairly small, this shouldn't be a big deal.

In the long-run, the macro answer might be that the local area will benefit from this. If this makes the business more profitable, and causes it to expand, the amount of revenue that stays and recirculates locally may actually go up.

From a micro perspective, this is obviously bad for local workers who no longer get work, and good for foreign workers who get it.