Economics of Outsourcing


Outsourcing Policy


Outsourcing policies vary greatly among nations and firms.  Policy makers take a number of effects into account when making their policies (see theory). 

Pro-Outsourcing Policy Considerations:

  • Globalization: Outsourcing increases globalization and opens trade, which is beneficial to all parties by reducing costs and increasing productivity.
  • Economic Growth: Outsourcing causes economies to grow due to increased productivity and globalization.  New jobs are created to fit the growing economy.
  • Employment: Many worry that pro-outsourcing policies reduce the number of jobs available to domestic workers.  But, a job gained overseas doesn't always mean a job lost at home.  The growing domestic economy will demand more workers.  Additionally, the major pro-outsourcing countries (U.S. and Britian) already have large job turn-over rates and are near full employment.  Jobs lost do to outsourcing are fairly neglegable since they are reallocated in the economy.
Figure One: Top reasons for outsourcing according to Michael F. Corbett & Associates. The reduction of costs is one of the most significant reasons for outsourcing.

    Reasons for Outsourcing
Anti-Outsourcing Policy Considerations

  • Globalization:  Globalization has negatively impacted the world.   Workers in smaller countries have been exploited by the growth of outsourcing in the global economy.   Outsourcing has created concerns regarding social justice and the fair treatment of workers.
  • Economic Growth:  The outsourcing of jobs has destroyed local economies.  As low wage workers attract jobs away from prominent local industires, workers within these industries are left without their jobs.  Towns that rely upon these industries are therefore permenently crippled as their economy is stiffled.
  • Employment: Unemployment within outsourced sectors becomes rampant.   This provides a negative effect on local workers who relied upon these industries for employment.  Jobs may be reallocated but not immediatly.  As jobs are lost new jobs are not made immediatlly accessible.

U.S. Policy: Bush vs. Kerry

Bush Administration:
From the beginning, this administration has had strong free-trade and pro-outsourcing stances, citing its ability to increase efficiency and productivity. Bush's policy believes that outsourcing is a positive transaction that will enrich the US economy in the long-run, even if it causes short-run pain and dislocation for those whose jobs are outsourced. N. Gregory Mankiw, chairman of Bush's  Counicl of Economic Advisors expressed this point of view saying, "Outsourcing is just a new way of doing international trade."

Kerry and Democratic Viewpoint:
During his campaign for presidency, Kerry took a some-what anti-outsourcing stance, proposing a change in tax laws so U.S. companies have less incentive to move operations overseas. A Kerry trade advisor, Ms. Lael Brainard was quoted as saying, "John Kerry doesn't want to end outsourcing. But he wants to end the kind of outsourcing that results from distortions in the tax code." It is also important to note that during his Senate history, the majority of the time Kerry has voted in favor of free-trade and outsourcing.


~"Economist Article Shows Outsourching's Bright Side." Office Pro. March 2005, Vol. 65 Issue 2, pg. 7.  Accessed on-line 9 May 2005.

~Parry, Robert T. "Globalization: Threat or Opportunity for the U. S. Economy." FRBSF Ecnomic Letter. Honolulu. 29 April 2004. Accessed on-line 9 May 2005.