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Economics of outsourcing

Economics of outsourcing has become an item of great interest in recent times. This is largely because of the increased redundancy rate experienced in the economy. Why firms would choose to outsource labor while there are massive job losses in its mother economy is a question that puzzles many, economists and non-economists alike. With globalization accelerating this phenomenon, it has started to look less appealing and more like a culprit. Outsourcing in this context occurs when labor from outside the country is used in place of labor inside the country.

This occurs for a variety of reasons but chief among them is the cost factor excuse. Over the recent years it has become increasingly cost efficient for companies, especially multinationals, to outsource to other countries which have lower labor rates and high technical knowledge. This has been accelerated by globalization, more specifically the internet. With this tool, service industry jobs have become increasingly cheaper to produce outside.

The manufacture industry has also experienced the same outsourcing phenomena, with countries that have cheap labor and high technology benefiting from the move (Baily and Farell, 2004). The financial reason has many facets. Pro-outsourcers state that there are no long-term cost relationships with the outsourcing

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workers. Also, they are able to use the skills and workers for much less and receive much more out of them. Examples in the IT world show that the average wages for IT workers in the US is $75,000 but is $7,779 in India (outsourcing).

So combining the two: no pension and Medicare costs with much lower wage rates the result is huge savings on labor (Baily & Farell, 2004). Another reason for outsourcing given is that the outsourced labor is more productive. According to Farrell and Bailey, the productivity of the outsourced labor is higher due to the lack of job stigmatization. This means for less amount of pay, they produce more output. This enables the companies to supply the home market with cheaper goods and better services such as 24 hour technical support.

The goods are consumed within the American economy, allowing the citizens access cheaper, and sometimes vital, services at much lower costs. For example, medical technicians in India cost less but do the same work and have the same skill as their American counterparts. Medical costs are cheaper and thus more affordable (Mann, 2008). These outsourcing companies also create demand for American products, with their IT equipment and machinery coming from the US.

This may also be due to the fact that some of the outsourcing companies are owned, in part or on whole, by US based companies. In a way, the workers also tend to demand more American goods, maybe because of their close interaction with American culture in their work experience. Statistics show that for every dollar that is spent by corporate abroad, these foreign companies spend 5 cents worth of goods on American products and services. In total, both the US and outsourced economies both gain from the strategy (Mann, 2008: Baily & Farell, 2004).

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