The Welfare Economics of Outsourcing
Outsourcing is a topic burbling in the background of economic policy. Foreigners located abroad are replacing Americans in service jobs. Some people complain of this competition, which drives down American wages in those jobs. The situation is similar to two other disputes, over imported goods and over immigration, and the basic complaint, “loss of American jobs” is the same in all three. The three have interesting differences, though, which are to outsourcing’s advantage and perhaps explains why opposition to it has not gotten far in terms of actual protectionist policies.
1. Imported Goods. The complaint here is that American workers in industries such as steel and textiles lose their jobs because imported goods are cheaper. To some extent, this is because labor monopolies in the US– the unions– have lost their monopoly, which would be a good thing. In other cases, though, it is simply that American workers are simply unwilling to take the jobs at the wages necessary to be competitive with imports. In such cases, there is a transition cost, as the Americans look for other jobs. Also, we may feel sorry for the Americans who have to make that transition, since they have been unlucky in their choice of industry.
2. Immigration. Immigration, legal or illegal, has a similar effect, in that the immigrants compete with native citizens for certain kinds of jobs. Here, though, the bigger concern is the effect of immigration on culture. Will the American government, entrepreneurial spirit, Tocquevillian spirit, drop to Mexican levels? Or, looking on the bright side, might American morals actually be improved by immigration from more virtuous countries or by the select nature of the immigrants?
3. Outsourcing. Unlike immigration, outsourcing has no cultural implications. The competing workers stay in India. Unlike goods protection, outsourcing has tended to be either of jobs whose loss does not require much readjustment (answering telephones) or of jobs in growing sectors (software design). That a sector is growing is important because it may happen that no American actually loses a job– instead, it is just that growth of employment in the industry is slower than it would have been. That undercuts the argument for protectionism.