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Economics Case Essay

3579 words - 15 pages

Introduction

Off-shoring and outsourcing have become especially prevalent in recent years due to the shift in foreign labour markets becoming more competitive, and even favourable in some sectors. It should be noted that domestic examples of outsourcing do not shift the labour market because within the country itself, there are no structural changes. As a result, this paper will focus on outlining the various off-shoring and outsourcing implications and effects on international labour markets.

Outsourcing vs. Off-shoring

Companies have been able to implement off-shoring and outsourcing because of the phenomenon of lower transportation costs and instant communication across barriers ...view middle of the document...

Over the long-run, wages will rise as supply adjusts, but there will still be lower wages than the starting point at w1. The long-run shows a drop in quantity of labour demanded, which increases the unemployment rate.

As seen in Appendix 1.2, the graph takes a foreign perspective. When outsourcing takes place there is an increase in demand for foreign labour. This causes wages to increase dramatically in the short-run, due to the lack of change in the supply of labour. Over the long-run wages will level out and decrease somewhat, however, they will still be higher than the starting point at w1. The quantity of labour demanded will increase along with employment.

As wages in the home country decrease and wages in the foreign country increase, there will be equalization in the long term global labour price. Ideally with no trade barriers, or transportation costs, the wage for unskilled labour could theoretically become the same worldwide.

Between the graphs in Appendix 1.1 and 1.2 it appears that foreign countries benefit, and this is the evidence that protectionists will supply when looking to create barriers to trade. Although the graphs do depict the labour markets well they do not tell the full story, and need to be looked at in context. In the next section outsourcing and off-shoring with a more analytical view.

Drivers to Offshoring and Outsourcing

From the previous pretext, this analysis has implied a scenario of a developed country off-shoring or outsourcing to a developing country. After observing previous surveys (source McKinley), the popularity among company executives lies in this common trend that has been employed throughout the paper. In the case when developed countries off-shore to developing countries, the main drivers are labour costs and country environmental and/or worker rights regulations and policies. Non-labour costs are expected to fall by half in between 2000 and 2010, however, since 2000 labour costs in developed countries have doubled (Figure 2 in Appendix A).

However, it must acknowledge that there are three other alternatives in which offshoring and outsourcing can take place. In the scenario of a developed country off-shoring to another developed country, the motive is linked to greater proximity resulting in decreasing transportation costs and greater specialization. Additionally it is also a method to avoid a foreign nation’s tariffs or quotas on the company’s final products. This promotes market efficiency and improves competitiveness. This is exemplified by the fact that “Toyota Motor still make[s] Corollas in Silicon Valley ' one of the most expensive places on Earth to produce goods” (Ritter & Sternfels, 2004) because the company believes the high costs of labour are offset by the savings in transportation. Additionally, being close to competitors and partners forms clusters of technological innovation that stimulate company interaction and effectiveness. This type of offshoring...

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