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Outsourcing Jobs, Insourcing Labour & Increasing Profits

Joseph Chamie is an independent consulting demographer and a former Director of the United Nations Population Division.

NEW YORK, Mar 14 2016 (IPS) - For decades “outsourcing” jobs from wealthy developed countries to low-wage developing countries has been a major strategy of many corporations, industries and businesses to increase profits by reducing labor costs and operating expenses.

For work and services that cannot be sent overseas, companies, organizations and private enterprises – often supported by government policies and programs – turn to “insourcing” immigrant labor, again aimed at increasing profits by stabilizing or reducing domestic labor costs.

Comprehensive international data on offshore outsourcing are not readily available. With relatively few exceptions, most government data systems are not designed to correlate domestic employment gains and losses with those overseas. In addition, companies are understandably reluctant to highlight their overseas outsourcing practices or publicize the numbers of jobs that have been transferred abroad.

Over the past decade data from the United States Department of Commerce show that U.S. multinational corporations – the big brand-name companies that employ a fifth of all American workers – reduced their work forces by approximately 3 million jobs while increasing employment overseas.

About three quarters of those jobs were in manufacturing. Also, between the period from1998 to 2008 manufacturing plants declined sharply, contracting by more than 51,000 plants, or about 13 percent.

In 11 European Union countries for which data are available, about 83,000 jobs were outsourced overseas between 2009 and 2012 in enterprises with 100 or more employees. France topped the list of jobs lost (more than 19,000) followed by the Netherlands (nearly 19,000) and Denmark (nearly 14,000). Again, most of the job losses were in manufacturing.

Important locations for American and European firms to outsource their jobs are China and India. Since China joined the World Trade Organization in 2001, it is estimated that some three million U.S. jobs have been outsourced to China.

In Bulgaria, Finland, France, Ireland and Norway, no less than one-fifth of enterprises outsourcing core functions abroad do so to China. With regard to support functions, EU countries, especially France, Ireland and Finland, are more likely to outsource those jobs to India than to China.

Business representatives, policy makers and governmental officials often stress the benefits of outsourcing, notably lower prices for consumers, and maintain that better jobs will be available to displaced workers.

However, few are able to specify those better jobs, spell out precisely who is receiving the rewards from the claimed benefits and cope with wage stagnation and growing inequality. Moreover, many displaced workers remain unemployed for lengthy periods of time and those who do find jobs are often obliged to take major cuts in pay.

The national security implications of offshore outsourcing have also been generally overlooked or discounted. Many developed country businesses have moved the production of their advanced technology products overseas, especially to Asia, while maintaining a domestic sales force to market the goods. A related concern is the risk of losing sensitive data and loss of confidentiality with regard to production and clients.

Many jobs do not lend themselves to be outsourced overseas, such as agriculture, dairy, landscaping, construction, trucking, hotel/motel room cleaning, retail jobs, care giving, food service, etc. For those jobs, according to economic theory, as domestic labor markets tighten, employers will offer higher wages to attract workers to their enterprises.

Fully cognizant of this economic dynamic, businesses generally seek to avoid a tightening domestic labor market. By urging and lobbying governments to “insource” increased numbers of immigrants, business enterprises aim to maintain or increase profit margins by stabilizing or lowering domestic labor costs.

For example, over the past quarter century, including during the recession years, the percent of the immigrant population among the G8 countries has by and large increased (Figure 1).

Source:  United Nations Population Division.

Source: United Nations Population Division.

Several recent instances of insourcing lower-cost foreign labor that have received media attention in the U.S. are Walt Disney World in Orlando, Florida and Southern California Edison. American workers at those firms reported that they lost their jobs to foreign guest workers on H-1B visas and had to train their replacements as a condition for their severance package and eligibility for unemployment insurance.

In addition to calling for increased numbers of immigrant workers, many businesses, especially small and medium-sized firms, tolerate the employment of workers unlawfully resident in the country. Many of those enterprises maintain that without those unauthorized workers they would struggle to meet labor shortages, especially as most citizens and documented foreign workers eschew those low-wage jobs.

In the United States, for example, although the unauthorized migrant workers represent 5 percent of the labor force, they are concentrated in a small number of occupations, notably farming, fishing and forestry (26 percent of the workforce), domestic workers (23 percent), clothing manufacture (20 percent), building and grounds (17 percent) and construction and mining (14 percent).

In addition, in the construction sector the unauthorized migrants hold about one-third of all jobs in drywall installation, and approximately one quarter of jobs in roofing and painting.

Companies who hire unauthorized workers can refuse to pay them minimum wages, fail to comply with safety standards and dodge paying taxes and employee benefits. Those practices in turn drive down wages, create dangerous working conditions, shirk tax obligations and engender unfair competition for law-abiding businesses.

While outsourcing jobs and insourcing immigrant labor may indeed increase profits and be beneficial by lowering labor costs and operating expenses, the general public and especially native workers find these practices to be onerous. Opinion polls find that large majorities of the public believe there should be greater restriction of immigration and increased efforts to keep jobs from relocating overseas.

In contrast, few governments view immigration levels as too high and are doing comparatively little to address public concerns and the fallout resulting from offshore outsourcing of jobs and insourcing of immigrant labor. The consequences of those immigration policies, laissez-faire responses to job losses and flat or falling real wages are reflected in loss of public trust, growing xenophobia, vigilantism, violence and political extremism as well as the strengthening of radical factions in many countries.

Continued neglect of the negative consequences of sending jobs overseas and importing immigrant labor can be expected to exacerbate already troubling social and economic conditions in many countries around the world.

For social amity, economic wellbeing, political stability and national security, governments and businesses should broaden their focus beyond simply increased profits and associated benefits for some and begin working together to meaningfully address the critical consequences of outsourcing jobs overseas and insourcing immigrant labor.


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