Economists have been debating the effects of offshoring on businesses and the U.S. economy as a whole for decades.
Some say it takes the white-collar service sector and blue-collar manufacturing jobs away from American workers. In contrast, others argue it brings a great economic benefit to the United States.
Well, the truth is that while some jobs are offshored, the number of jobs retained is far higher. At the same time, globalization and the changing labor market have made offshoring of services a necessity to remain competitive.
In this article, we’ll discuss offshoring briefly before launching into how offshoring benefits the United States and how the government can help change this image of offshoring in the minds of average domestic workers.
This Article Contains:
(Click on the links below to go to a specific section)
- An overview of how offshoring benefits the United States
- Changing the narrative surrounding offshoring
An overview of how offshoring benefits the United States
Offshoring refers to relocating a business process to another country, typically for cost-saving purposes. The offshore activity can be done either by a foreign affiliate of the parent company itself or by a third-party service provider.
There are two major types of offshoring: production offshoring and services offshoring.
In production offshoring, manufacturing operations are offshored to a foreign country.
In contrast, services offshoring includes administrative and BPO (Business Process Outsourcing) such as:
- Human Resources (HR).
- Accounting and finance.
- Call centers and customer service.
- Software development and other IT (Information Technology) services, and more.
These countries are attractive offshoring destinations due to their:
- Comparatively lower cost of living.
- Lower labor costs.
- Lower minimum wage and average salaries.
- Availability of educated and skilled labor.
- Free trade agreements between developing and developed countries.
- Financial and tax incentives for moving business operations to a developing country.
Read our related article on whether cost-saving is the only reason managers choose to offshore.
While offshoring is often looked at negatively as American workers fear losing jobs to foreign workers, multiple studies have found these fears are generally unfounded.
Let’s explore the impact of offshoring on the company level and the U.S. economy.
1. Little impact on employment and wages
While offshoring is a common business practice for many U.S. companies, it’s still an incredibly complex process.
As a result, you’ll typically find that many tasks and jobs simply can’t be offshored.
For many, the hidden costs of offshoring could increase overall costs, meaning offshoring may not be the right option for a U.S. firm.
A) Limited job loss
According to the Bureau of Labor Statistics, the U.S. economy created 6.4 million American jobs in 2021 during the pandemic.
Out of these, only about 300,000 service jobs are offshored every year, leaving the lion’s share of the service industry available for domestic employment.
McKinsey also predicted in 2005 that less than 1% of all service sector layoffs would be due to offshoring. That trend has remained true to this day, with the layoff rate remaining unchanged by the pandemic and staying steady at 0.9% in March 2022.
B) Negligible change to wages
Since the ratio of job creation to offshoring is so little, the impact on American wages will be imperceptible.
Even in the competitive IT industry, where higher wages are commonplace, offshoring has not impacted the hourly rate most freelance software developers or dedicated providers charge.
In fact, IT jobs have seen a bigger exponential growth in wages and salaries than most other professions due to their high demand.
For instance, the average annual salary of an American programmer in 2001 was 62,890 USD, whereas this rose sharply to 92,610 USD per year in 2019. While annual wages increased by 47%, the actual number of people employed dropped by 60%.
This lends credibility to the theory that offshoring will not impact wages, but demand and specialization will.
2. Corporate savings
While there is an obvious cost benefit to corporations, there’s a greater benefit to the U.S. economy.
But how are these savings possible?
The answer lies in the difference between the American economy and that of the offshore country.
For instance, a call center job in North America might be considered low-skilled, but the same job is considered high-skilled in India. This is because these jobs require a high level of English proficiency, which means there is less likely to be high runover.
In the manufacturing sector, these savings benefit consumers directly as companies can lower the prices of their goods based on the manufacturing cost.
For example, according to Intel, the production cost of a microprocessor chip is about 40 USD which is marked up and sold to consumers at a rate of 637 USD per piece.
On the other hand, offshore workers in India can produce a similar quality microprocessor at less than 100 INR (1.31 USD) en masse. Such a low labor cost can help companies reduce the price of a microprocessor for the customer while still maintaining their profit margins.
They can also take advantage of the time zone difference to run operations 24/7, giving them a leg up over their competitors.
In this way, offshore jobs directly impact the American economy and people by lowering costs for goods and services.
3. Additional exports
Offshoring benefits the U.S. economy by increasing its exports as well.
Let’s say an American company is offshoring its call centers to India. This Indian branch may need to buy specific equipment such as computers and software created by other American companies.
This call center might be equipped with Microsoft software, HP computers, and Lucent telephones. Multiply this by the thousands of call centers in India, and you get a substantial customer base from one country and one industry alone.
No wonder the U.S. exports to India in 2019 alone were almost 58.6 billion USD!
4. Repatriated profits
According to the U.S. Bureau of Economic Analysis, corporate profits include the total profits earned through current production by U.S. companies.
This is an important indicator of corporate financial health and overall economic performance.
Since offshoring usually means a subsidiary company is responsible for the manufacturing or service operation in the offshored location, the profits received by the parent company are regarded as American profits.
For example, General Electric’s branch in Bangalore, India, is the world’s second-largest R&D (research and development) center. It’s responsible for communicating with other international branches and coordinating with suppliers, partners, and other technology centers.
The profits generated by this R&D center are counted as GE’s profits and come back to the U.S., helping to boost America’s standing in the world economy.
Read about some more offshoring examples that can help you make the right decisions for your company.
5. Productivity and new jobs
With all the savings and new sales companies receive through offshoring, they have enough capital to create new jobs for American domestic workers.
This has happened throughout the years as manufacturing jobs have moved overseas, and more white-collar jobs have become available for Americans.
According to the U.S. Bureau of Labor Statistics, the manufacturing employment rate in 2019 was 12.8 million people, down from its peak of 19.6 million in 1979.
Even when manufacturing employment in the U.S. was falling, the actual output produced by these factories increased. This is probably due to better workflows and improved machinery.
Such improved U.S. labor productivity meant more goods were available for American consumers to buy, leading to a better quality of life.
However, this doesn’t cover gains made in various other industries.
For instance, the internet boom of the 2000s meant that many job titles that previously didn’t exist suddenly took the front stage. Additionally, the automation boom of this era meant many manufacturing jobs were made obsolete due to improved mechanics.
Today, these jobs, typically in the IT industry, are most in-demand as they help bring down manufacturing costs while improving production output.
Offshoring or even outsourcing (handing over operations to third-party providers entirely) can further reduce costs. Offshore outsourcing software development, for example, can help companies constantly improve their software offerings to consumers at a more affordable price.
Even with all these benefits, it can be tough for many U.S. workers to see the big picture when they’re getting laid off.
In this next section, we’ll explore some steps the government can take to prepare workers for this globalized economy where offshoring is the norm.
Changing the narrative surrounding offshoring
While it may be tempting to simply expect the offshoring tax on U.S. multinational corporations (MNCs) to solve many problems, many say this would be a mistake.
The tax penalty will increase the overall tax MNCs pay if they’re offshoring. However, according to the Peterson Institute for International Economics, this would not bring back any lost jobs but simply disrupt the global supply chains, harm America’s competitiveness, and threaten existing U.S. jobs.
Let’s look at what the government can do to allay the fears of domestic workers while still remaining supportive of domestic firms and their decision to go offshore.
1. Ease transition for displaced U.S. workers
While offshoring can lead to job creation, one might argue that these white-collar jobs may not be suitable for all displaced workers.
Many blue-collar workers might feel they lack the training or educational qualification required to apply to these new jobs. This can create and often leads to a sense of dissatisfaction with the practice of offshoring and a sense of resentment towards offshore workers.
Here, employers can take over and provide employees with more training programs. They can also support workers looking to go back to school to learn a new skill or gain the necessary qualification for a white-collar job.
The government can simplify this process by requiring employers to provide employees with these opportunities before offshoring any business process.
Such constant training and education also provide American companies with a better, more qualified labor force to fill any open position.
2. Prepare employees for more job changes
Due to offshoring and globalization, dramatic shifts are constantly happening in every labor market.
This could mean a single employee may have to face multiple job changes. If job opportunities are available, this employee will not feel disgruntled but rather excited by each new prospect.
The government, for instance, is already addressing this by introducing many clean energy manufacturing jobs to counteract both climate change and the loss of jobs due to offshoring.
Additionally, employers and the HR department can play their part by offering more technical skills to their employees. This will help make the job transition easier while also providing employees with multiple skill sets to raise their standard of living.
3. Place emphasis on growing U.S. soft power
Whether in everyday life or in terms of foreign policy, offshoring creates soft power for any country.
For example, international trade relations between the U.S. and India are at an all-time high due to the high amount of offshoring and outsourcing taking place from the U.S. to India.
This benefits the American economy in strict numbers and helps spread the American culture in India. It means Indian workers can provide a better working environment for these American MNCs to set up their branches.
This soft power gives America a leg up in the world economy. The friendlier it is with different countries, the more influential it becomes.
While offshoring is common in the manufacturing industry, lower-cost services offshoring is growing day by day with no signs of slowing down.
In this case, it can be easy to think that offshoring is a negative practice that takes jobs away from American workers. Yet, it actually pays back both financially and in terms of productivity, as we’ve seen.
Offshoring, when done right, can boost the American economy, which can lead to more job creation in the U.S. for domestic workers.
However, the government and corporations must take some steps to ensure workers don’t feel unhappy by specific jobs moving to a different country.
They can address any skill gaps by committing funds towards re-educating workers to fit white-collar jobs better while also promoting training programs within the workplace.
Andy is a technology & marketing leader who has delivered award-winning and world-first experiences.