The outsourcing of American manufacturing and service jobs has been a huge trend among US companies in the last 40 years. There are many business reasons to move overseas including to take advantage of natural resources and to be more responsive to local markets. The biggest critique of moving jobs off-shore is that companies are sacrificing too much by simple wanting to save money on labor cost. Critics are claiming that by moving off-shore they are only satisfying a short-term cost benefit, where they are losing long-term competitive advantage at home. As foreign competition increased, the pressure was felt mainly by the manufacturing sector, where international trade was generating large net benefits to national economies. Benefits to the national economy included overall efficiency, and lower prices, which led to a higher aggregate welfare. Although trade causes a higher aggregate welfare, many US citizens are against outsourcing manufacturing and service jobs. Most of the negative views of globalization are that the money gained from outsourcing isn’t distributed among all the classes. Some of the biggest issues with movement toward international trade is the price of moving workers from their industry jobs into other parts of the country. The visible amount of job loss and failed government sponsored unemployment benefits to compensate those workers has clearly caused popular support of globalization to weaken. With the global economy having the most to gain, and the low prices of products in the US strengthening the domestic economy, service workers and most of all manufacturing workers have the most to lose from outsourcing of American jobs.
Globalization allows for periphery and semi-periphery nations to gain a larger role in the global economy, and allows for increased employment, while modernizing their nation through manufacturing. Globalization often calls for outsourcing of manufacturing and service jobs under cheaper labor, making the economy more efficient and ultimately lowering prices, promoting growth. Worldwide GDP growth has been accelerating, specifically in middle and low income countries like China, Brazil, Russia, and India. Despite the average GDP growth of the world being 3.4%, the US GDP has only averaged growth of 2.7%, seeming small compared to the remarkable GDP growth of China which is 9.9% (Robertson et al. 2014, 77). Along with the rise in global GDP, is has allowed for a more efficient economy, allowing comparative advantage and specialization.
This specialization and promotion of free trade has allowed the US to import cheap goods, keeping the prices of goods down, ultimately benefitting all US consumers. Trade in services have also grown very rapidly, from 1992 to 2002, service exports have grown from $163 billion to $279 billion, and imports have grown from $102 billion to $205 billion (Kletzer 2005, 43). Most Americans are skeptical of outsourcing and free trade because much of the costs lie on the workers. “Economic theory suggests that not everyone benefits from free trade: Positive economy-wide benefits result from the gains of the ‘winners’ exceeding the losses of the ‘losers’” (Kletzer 2005, 38). With these huge gains to the winners and huge losses to the losers, it creates a debate among US citizens where the winners want to keep winning and the losers want to stop losing.
The restructuring of America’s industry since the 1990’s has revolved around outsourcing. Most of the outsourcing has revolved around manufacturing jobs, like completing basic repetitive tasks and has been very specialized. Many of these manufacturing jobs are in the industries of electrical machinery, radio and television, apparel, motor vehicles, and footwear (Kletzer 2005, 39). Today, outsourcing is involving service jobs, which are tasks such as design, engineering, or research, which require high levels of education (Robertson et al. 2014, 78). The cost of communication has gone down greatly in recent years due to technology improvements, allowing for the outsourcing of service jobs to be easier, and done with a better quality of work.
In an article from the Franklin Business & Law Journal entitled “The Globalization of Manufacturing and its Impact on the US Economy” the authors analyze a study by The Review of Economics and Statistics. The study found that American workers had a real wage loss of 12 to 17% as a result of occupational switching due to transfer of job overseas (Robertson et al. 2014, 76). The globalization of manufacturing and services undoubtedly has had an impact on wages of Americans.
Since the 1970s, wages have been on an increase in the US with in increasing pattern of inequality (Robertson et al. 2014, 77). While in recent years many US citizens’ salary has gone down, individuals in the top one percent of US income rose 18.3% from 2000 to 2007 (Robertson et al. 2014, 77). Of those that are displaced by outsourcing, two-thirds of those reemployed workers are earning less from their new job than their old job, with one-quarter of those earning less experiencing more than 30% loss of their previous salaries (Kletzer 2005, 43). The lower class in bringing is less income while the upper class, and more specifically the top on percent is bringing in more income.
A study referred to in the Journal article by Franklin Business & Law Journal by the Journal of Economic Perspectives refers to a graph (see Figure 1) that shows the recent trend of US incomes based on education. In Figure 1 you can see that before 2000 all education levels income was rising, and after 2000 all of these groups declined in income. Although wages have a huge part in the pressure of US companies to move offshore, an article from the Harvard Business Review claims that less developed countries’ workers are less productive than workers in the US, so it is inaccurate to have a straight comparison of wages (Markides et al. 1988, 117). It is also a risk to move more jobs offshore because there is risk of the less educated workers making quality mistakes, when moving production or services offshore, it takes a lot of control out of the company, causing dependency on foreign producers.
Author Lori G. Kletzer, in an article from Economic Perspectives attempts to address the amount of job loss in both manufacturing and service sectors. Using data from many US bureaucratic agencies Kletzer estimated that 18.6 million workers lost their jobs in manufacturing from 1979-2001 (Kletzer 2005, 42). This statistic accounts for 37% of all job loss in this time period, when manufacturing jobs only equated to 18% of total employment (Kletzer 2005, 42). This proves that individuals in the manufacturing sector where hit much harder during the reformation of US industry through outsourcing. Many of the individuals in those manufacturing jobs had difficulty being reemployed as a fair salary.
A recent shift to service job outsourcing means that as a more-educated worker, you have become more likely to lose your job due to outsourcing. In the period 1979-2001 there has been on average a risk of job loss of six to seven percent for manufacturing workers, and two to three percent for service workers (Kletzer 2005, 44) with an upward trend in service job risk, starting at a relatively low level. Reemployment wages average to be about 70 to 75 percent for service jobs, while being 65 for manufacturing (Kletzer 2005, 44). Because many individuals that are in service jobs are better educated than those that are in manufacturing jobs, there is a direct correlation between education and earnings, as seen in Figure 1. This shows that mean earning losses are smaller for service workers and the more educated than manufacturing workers and the less educated.
Outsourcing causes pressure on home soil. As more companies choose to move business overseas, more jobs are lost and trade deficits worsen. The populist ideology against outsourcing puts huge pressure on the government to pass legislature to further protect US jobs, and keep American businesses on US soil. There is also huge pressure on the government to help those who are unemployed due to outsourcing. The TAA (Trade Adjustment Assistance) has been the main adjustment assistance program to those that have suffered from trade and outsourcing of jobs (Kletzer 2005, 43). The TAA focuses on helping workers displaced by “trade” while other workers are only being deemed eligible for less benefits, the TAA also targets those that loss their jobs in manufacturing, currently the U.S. Department of Labor denies TAA services to those that were displaced in the service industries (Kletzer 2005, 44). Although those that are in service jobs have a smaller mean earning loss from outsourcing, they are not under the protection of the TAA.
While much of job loss in the last 40 years is easy to blame on the ever rising outsourcing of US jobs, there are many other factors that are just as likely “notably, technology change, rank ahead of trade as a source of job loss and declining real wages for less-educated workers” (Kletzer 2005, 43). There are many reasons that much of the US working class experienced recent job loss. As listed by Kletzer, there are huge advancements in technology putting many workers out of jobs, as well as corporate restructuring, changed in consumer demand, and shifts in international investment.
Within the various IPE perspectives, the US’s current state of globalization can be seen as being in a very good state or a very bad state. A mercantilist or protectionist would stay that we are far to dependent on other nations and our trade deficit is far too low. They would have the opinion that American businesses needed to make huge changed and move back to domestic soil to promote US economy, and protect our workers. Mercantilists would also want to demote free trade, and impose tariffs on other nations to promote businesses to operate domestically. While an economic liberal would say that we need to engage in more outsourcing to be the most productive possible as a global economy, being as efficient and produce more. An interventionist would have the perspective that the US needs to protect those that have the most to lose, and that government programs need to be more beneficial to those that lost their jobs to outsourcing in both manufacturing and service jobs.
Within domestic economies, there are clear individual losses due to job loss and reduced income, but there are also clear net benefits of lower prices and overall economic efficiencies. Individual losses can also not only be blamed by outsourcing, but due to many other factors such as technology. Outsourcing helps our competitors, and makes the US more dependent on other nations, but it also brings many benefits to the US. The global economy has the most to gain from outsourcing of American manufacturing and service jobs. With globalization, we have seen much more specialization among nations, causing GDP growths among almost every nation to have an upward trend that has previously gone unseen. The US economy also has a lot to gain, because of the availability of cheap foreign labor and foreign natural resources as well as the promotion of free trade through the World Trade Organization and trade deals such as the North American Free Trade Agreement, prices in the US have been able to stay relatively low, benefiting every citizen. Those that have the most to lose from outsourcing of American service and manufacturing jobs are the workers. Workers bear most of the burden of labor market change and flexibility. Where the least educated in manufacturing jobs are getting hit the hardest, as well as recent broadening to many white collar service jobs. Globalization has caused wages to stagnate, while the Gross Domestic Product is growing. This imbalance should definitely be addressed in the near future, hopefully resulting in the ‘losers’ losing less, and the ‘winners’ gaining less.