Monday, June 25, 2007

Productivity and not Outsourcing Responsible for Job loss in the US

Offshore Outsourcing is so often stated responsible for the gloomy job market in the United States. Is outsourcing the sole reason for the job losses? Here is an objective look at the matter.

Every time a new, more advanced technology is introduced into any industry; there is always some form of retraining, reduction in scope, or redundancy. Why then has offshore outsourcing created so much uproar? Probably because of the scale and speed of change!

Comparative advantage! Yes, that what fuels offshore outsourcing. A benefit in cost, skill or speed provided by a country in comparison to other countries draws business from the United States and other western nations. In the 1980’s this transition began with the manufacturing industry, who in order to save labor costs continued to do their design, development and marketing work on their own while outsourcing their manufacturing operations. The same trend is being mirrored by the service industry. To stay in the competition and to stay afloat, downsizing/ laying off, cost cutting, investment in new technologies, process reengineering and outsourcing become necessary. In fact, these are the factors that drive outsourcing. Why then is outsourcing considered the prime culprit for the job losses?

More than outsourcing, it is productivity that is responsible for the current situation. The rising productivity in the US means a growing number of jobs which are to be accomplished by a fewer number of men. Labor costs are falling but capital costs are falling faster, and that makes it more advantageous to invest rather than to hire. The cost savings are invested in innovations or building a competitive edge. And, the fact that is not so often cited is that the United States imports far more jobs than it exports and has the best re-employment rate in the world.

Also, what is lacking today to cause this furor over outsourcing is probably the fact that in the current productivity boom there are no new and innovative industries that create jobs to replace those that are lost, like the car manufacturing industry in the 1920s, commercial aviation in the 1950s and 1960s and information technology in the 1990s. Currently, we are all waiting for the next big thing to happen, be it healthcare, pharma, biotech, energy — all of which can make a big impact.

Hence, the negative connotations of outsourcing will not really help in increasing the number of jobs in the US but they will definitely limit and restrict productivity. Moreover, there’s very little to show that outsourcing does in fact cause job loss in the US. On the contrary, a Boston University Professor examined the effect of outsourcing on large financial firms, and found that less than 20 per cent of workers affected by outsourcing lose their jobs; the rest are repositioned within the firms.

In the present scenario, sectors such as construction and health care are positioned to exploit the benefits of outsourcing to the fullest. The result will be a decrease in their cost of production, and improvement in quality and output.