Outsourcing

What is outsourcing?

• Hiring foreign laborers to perform the same job that had previously been held by an American

Why do businesses outsource?• Increases the amount of laborers at cheaper

rates• Increased laborers equals increased productivity• Gives business advantage over competitor

companies• Tax benefits – Poorer countries welcome big

businesses to boost their countries economy. As an incentive, these countries offer tax breaks to those businesses that outsource to their country.

Effects of outsourcing on the microeconomy

1. Helps companies to maximize profits– Outsourcing cuts costs of wages employers have

to pay employees

2. Smaller companies (“mom and pop shops”) that cannot afford to outsource products to/from lose money– If smaller companies do not outsource, they

cannot afford to lower the prices of their products

Effects continued…– Consumers naturally follow the economizing

principle by making the best use of limited resources, and smaller companies cannot compete with larger companies that can afford to outsource.

– Companies such as Wal-Mart have forced many smaller companies to close because they could not compete with Wal-Mart’s low prices.

• 3. Big companies win, Consumers win; Small companies lose, Consumers lose

Effects continued…

• Outsourcing helps companies save money by lowering prices, which makes consumers happy that they can save money. However, when companies hire foreign laborers to work for them, the companies no longer need the American workers that had been performing the job previously.

Effects of outsourcing on the macroeconomy

1. Offshore investment-spending money in other countries instead of the U.S.– Good for the global economy because it helps to boost

the economies of poor and underdeveloped countries– This is not good, however, for the American economy

because it takes money away from the U.S. economy– By 2015, 3.3 million jobs from the U.S. will be

outsourced– This will generate $136 billion in wages for other

countries!!

Effects continued…• 2. Creates more competition for lower paying

jobs in the U.S.– Outsourcing affects jobs such as telemarketing,

human resources, information technology– If these jobs are outsourced from the U.S. to other

countries, people that had/want those jobs now have more competition between each other

– EX: If one company has 1,000 telemarketing jobs and then 600 are outsourced to save the company money. There are now only 400 people with telemarketing jobs in the U.S. with 600 other people trying to take that job away.

Effects of outsourcing on local economies

• 1. Creates a domino effect for related companies– Ex: Newark Chrysler Plant

In 2009, Newark Chrysler Plant cut 700 jobs due to competition from outsourcing companies

Effects smaller, related businesses that depend on employees from the plant as customers

Local Deli Train Station Effects UD City of Newark State of DE

Effects of suppliers of deli (bread, soda, chips, etc…)

Less ticket sales from employees

Business relationship (discounts to sporting/academic events, use of UD-owned grounds

Property taxes from the Chrysler Plant cost over $300,000 annually

Plant generated $300 million for DE economy—via housing, transportation and employee spending