Increased Offshoring of Production - Coursework Example

Investigate the employment and wage consequences for developed countries of the increased offshoring of production over the past 30 years. In the past three decades improvement in the globalization process has been observed due to incline in offshoring production utilities. The term explicitly conveys relocation of employment from developed countries to under developed ones, yet; workers of developed countries face unemployment in the due process. The objective of offshoring is to find low cost workers and production units, which intermediately reduces the cost of finished products, consumer can benefit from it and producers can receive handsome profits (Feenstra and Gordon, 908). The process generates specific advantages for the producer and consumer, but some economist belief that it is adversely impacting the home country and its low or high skilled workers in the long run. The scope and effects of offshoring has direct impact on employment and wage ratio in the home country, but it is also dependent on the economy of the home country. Yet, in the long run the overall impact of offshoring has become a controversial subject for the economist as its results/consequence are becoming apparent gradually and will not show immediate effect on economy. On the other hand, it is significantly evident that offshoring has increased profits, has increased the demand and need of high skilled workers, increased the buying capacity of consumer, but reduced commodity prices and minimized the exporting ratio with the help off-shore industries. Offshoring has been stirring up welfare issues in the long term for developed and developing countries. Relocation of production plants along with employment opportunities has consumed many economists to research the trade integration in a wider context. Relocation of production units will increase unemployment ratio in the home country for short term, but its effect on relative wage will be permanent for low skilled workers (Bottini, Ernst, and Malte,15). With the advent of advance technology and newly researched theories of business management, the process of production and its efficiency is noticeably enhanced. This in turn has increased the turnout value, development of competition in the business arena, global circulation of advance technology and distribution of researched knowledge. Hence, global culture of business increases the profits for the firms, but it makes the stability of developed countries in the business world fragile due to their dependency (Foster, 1). Offshoring has become a popular trend in the business arena because it has brought cheap labour and low cost material in the production unit without extra expenditure on the head of the entrepreneurs. Secondly, developed countries can easily utilize the resources of host countries and produce profits. Nevertheless, Modern economy rely more on efficient human resource and this is evident in the case of natural oil extraction in KSA, where human resource has a major role to play. Yet, qualitative changes occur with the advent of Offshoring and this is due to the immense changes in quantitative aspects. Likewise, offshoring has inaugurated a global trend of wage inequities, compromising working conditions for low skilled workers, and displacement of skilled employees. The last premonition is associated to offshoring in respect to the pessimistic supply effect, which generates low employment opportunities and reduces wages of low skilled workers in home country. This effect is continuous in labour markets, which have been dominated by technological changes. Likewise, apprehensions regarding public inclination to invest in the education for skill development will lower and this change will produce a long term gap of particular skill in a host country (Bottini, Ernst, and Malte, 16). . Simultaneously, International theory suggests that offshoring in long term will impact on the employment ratio in developed countries and workers will face problematic wage and skill issues due to it in home country. Despite of offshoring countless advantages, it is bringing a long term gap in the wage and skill requirement in the home country and developing a crises for low-skilled workers at home. The pervasive increased demand of high skilled workers by developed countries like USA is a prominent example of it. Yet, the demand of skilled workers has increased the skilled workforce around the globe, which has given a boost to the average pay rate in almost all the industries of USA. (Foster, 9) Many researches and models have been presented to portray the impact of offshoring on the home country, but Jones and Kierzkowski’s model has been taken into consideration to show how a previously running production process is segmented into two or more sectors to be transferred off-shore. He proposes the theory of capital intensive segment, where any developed country discontinues its home production facilities to invest in developing countries so to produce profits and to reduce the cost of finished goods. Through this action his participation in the world trade does not decreases, but its influence enhances due to trade ties and investment links to host countries (Bottini, Ernst, and Malte, 17). Similarly, if a country lacks skills to produce any commodity aptly and the cost of production is also not competitive in the country then the home country will move its production utilities to the efficient manufacturing countries. In the mean process employment ratio will decline, but it will become a part of a country’s competitive trade policies and occupational restructure. Throughout past three decades, American firms and their domestic production employment has declined progressively. Since, 1982 up till 1999 foreign skilled workers and labour force employed in US-multinationals have increased from 30% till 44%. Hence, these shifts in production developments have convenience the anti-globalization circle to conclude that USA has is cutting skilled jobs in home country and is increasing the unemployment rate of labour force at home ( Harrison and McMillan,1). In USA, first industrial revolution produced multiple industrial job opportunities and in 1980, 84% US public was engaged in farming and only 3 % population was engaged in manufacturing jobs. (Foster, 2) However, since 1960 as developed countries focused their economies on productions; manufacturing jobs saw an incline of 25%. The second industrial revolution changed yet again the pattern of business society and shifted entrepreneur’s focus from production of goods to production of services. Thus, in 1960 employment ratio for services-sector was 65% and manufacturing job sector was 35% only. Nevertheless, in 2004 only 1/6th percent goods producing jobs were left in USA and majority of the public 5/6th engaged itself in service-producing employments. Since then the trend of service sectors is enhancing in developed countries. Thus, according to the report of Economic Cooperation and development since 1967 and up till 2003, increase in the service sector employment rate is 19% of the total employment in US and other countries (Blinder). Consequently, since 1982 up till 1999, multinational firms of USA reduced the domestic employment ratio by 4 million and in the mean time skilled workers were recruited from the under developed countries on low wages. This trend is steady and is still practised around the globe where a parent company sends it low paying jobs to under developed countries only. Yet, the third industrial revolution is in the age of internet and technology, where data and information flow around the globe is swift and cheap. This easy and cheap flow of information makes the tradable services flow easier for the developed and under developed countries as well. Since 1960, in US production workforce has decreased reasonably and there have been three main reasons behind it. With the advent of technology, now production is more reliant on technology than on human work force. Likewise, the ratio of poverty around the globe has declined and the spending trend of consumers has slightly changed. They prefer to spend on services (restaurants/ airflights/ spa treatments/ vacations) as well rather than only commodities produced (clothes/ make up/ cars/ cell phones). And finally, US has become an importer of finished goods than producing them on its own land as since 1953-2004 productions GDP in USA has declined from 30% to 13 %. The decline in manufacturing trend is a quantitative sign of the second industrial revolution, but it is not the cause of raised unemployment in America (Blinder). “Plot of Relative Wages against Relative Employment in the United State of America” in (period between years 1990 to year 2001) (Foster 04) Since 1982 up till 2002, the employment ratio decreased 22 million jobs to 17 million eventually. This swift decline impacted on high and low skilled workers differently. As high skilled workers with college degree were paid more than any average skilled high school graduate. The intricacies were more continuous for workers without a degree, the raised demand of qualified skilled professional produced income inconsistencies as the later were paid high and the former were paid low (Harrison and McMillan, 1). From 1997-2002, offshoring was evidently affecting the employment opportunities of low skilled workers in America, but was showing affirmative impact on the high skilled workers due to their increased demand. Econometric results of a study show that due to offshoring trend the demand and wage of high-skilled services was increased gradually by 2 % and if offshoring had been at its preliminary levels the raise wouldn’t be occurring. However, low-skilled workforce demand has declined in the home country by 0.1 up till 0.4% (Gorg, 31). So in the respective years, due to offshoring-outsourcing 49, 000 vacancies were developed for high skilled workers, but medium and low skilled workers faced employment loss of 65,000. United States of America Unemployment, Inflation, Nominal GDP and Real GDP (in %) Sr. # Years Unemployment Inflation Nominal GDP Real GDP 1 1994 6.1 2.6 6.27 4 2 1995 5.6 2.8 4.65 2.7 3 1996 5.4 3 5.72 3.8 4 1997 4.9 2.3 6.3 4.5 5 1998 4.5 1.6 5.53 4.5 6 1999 4.2 2.2 6.37 4.7 7 2000 4 3.4 6.39 4.1 8 2001 4.7 2.8 3.36 1 9 2002 5.8 1.6 3.46 1.8 10 2003 6.00% 2.3 4.7 2.8 11 2004 5.5 2.7 6.38 3.8 12 2005 5.1 3.4 6.49 3.3 13 2006 4.6 3.2 5.98 2.7 14 2007 4.6 2.8 4.87 1.8 15 2008 5.8 3.8 1.87 -0.3 16 2009 9.3 -0.4 -2.47 -2.8 17 2010 9.6 1.6 4.22 2.5 18 2011 8.9 3.2 3.22 1.6 19 2012 8.1 2.1 4.23 2.3 20 2013 7.4 1.5 4 1.9 21 2014 5.9 1.7 4.12 2.1 (gpo.gov) This hypothesis is assumed from the received data of US Occupation-Industry in respect to wage and occupational levels in the country. The hypothesis suggests here that the change in occupational and wage variation depends on the current trends of global business in which tradable jobs are negatively influenced by the offshoring. In comparison to this, offshoring is scaffolding jobs which require intricate skills in advance manner and it is also due to new tech-production utilities and the need of experts to run them. However, there are no the qualitative outcomes extracted through the above mentioned data analysis are not distinctive in their nature with respect to other theories available on the investigated aspect (Gorg, 31). Yet, generally productivity in USA has increased since 1980 and maintaining increased value of economy through higher value added parts, but decline has been observed in skilled employment. However, since 1990 the increased impact of offshoring on the labour market was too evident and the above/below mentioned graph from 1970 till 1999 shows how relative wage and employment progressed during this period. Relative wage entails the high and low skilled payment ratios and relative employment entails the high and low skilled jobs. Through the aid of following graph one can ascertain that employment and wage ratio of high skilled workers will increase with the time. The timely progression of these two correlated aspects (wage and employment ratio) has significantly impacted on the demand and supply curves. The same demand and supply trend was also observed in others developed and under developed countries as well (Neil, 1). Table 1. Theoretical wage effects of offshoring   Low-skilled workers High-skilled workers  Offshoring of low-skill production Productivity increase of low-skilled workers  Wage↑  - Labour supply effect  Wage↓  Wage↑ Relative price effect on final goods  Wage↓  Wage↑  Offshoring of high-skill production Productivity increase of high-skilled workers    Wage↑ Labour supply effect  Wage↑  Wage↓ Relative price effect on final goods  Wage↑  Wage↓  Source: (Görg, Geishecker and Krieger-Boden, 2011) Theoretical framework of Grossman and Rossi-Hansberg’s depict the vivid differences in the process of offshoring high or low skilled employment opportunities from the home country. It also assesses the impact of offshoring skilled jobs and its relation to wage incline or decline. There were three different types of effect on wage, which were detected due to offshoring skilled jobs. According to their theory, when any low skilled job is exported or transferred to foreign regions, efficiency in the low skilled workers of home country will increase and with incline in their efficiency/skill wages too. Simultaneously, when low skilled jobs are transferred the low skilled workers at home will be free, the demand of that particular skill will stop and workers will acquire new skills (Görg, Geishecker and Krieger-Boden). In addition to it, when supply of low skilled workers increase the real wage decline in such occupational sectors then. Lastly, when low skilled jobs are transferred to host countries due to low production cost the decline in relative price of the produced commodity will negatively decline the wage of the worker. To sum up all the above effects, offshoring tends to put positive impact on the wages of high skilled workers when low skilled jobs are transported. However, wage-effect of low skilled workers due to offshoring is somewhat vague. In a similar manner, if high-skilled jobs are transferred abroad then low skilled worker will take advantage from this offshoring and in such a case high-skilled workers experience vague effects (Hummels, 34). Yet, the results of the above effects show that offshoring has diverting effects with respect to wage and skilled employment. The relationship between trade policies, numerous business variables have a strong link with relative wage. However, one study suggests that the impact of all the trade variables on relative wage is short term and with the dynamic business trends they will be balanced in few years (Foster, 6). This hypothesis is based on Stolper Samuelson theorem, which determines that any boost in the sale price of a produced commodity will directly raise the value of return factors employed in the manufacturing process. This describes how a state full of skilled workers will suffer competitive market and thus increased competition will result in high requirements and wag gap between middle and low skilled workers. For instance, one can observe that China has been packed with low skilled and low waged workers and has only a little proportion entails high skilled workers. However, USA has the largest ratio of high skilled workers with 22 % and only 13% low skilled workers. Since 1995-2008 the average pay rate for skilled workers has lowered in USA and the rest of the world (developed countries) they have moderately increased. However, difference in income is basically due to the acquired skills. As high-skilled workers income has increased rapidly, but in the mean process medium and low skilled workers income has declined (Foster, 20). The difference is apparent here as high skilled workers earn more than twice from the average workers. Before 2000, income increase was not observed of skilled workers; yet, demand of low, medium and high skilled worker increased gradually (21). Since 1998 up till 2008, offshoring has been evidently producing negative impact on the input from the labour share value of 35 production and services units of USA. This low contribution from the labour sector is due to the functional distribution of employments by the developing countries. However, increased trade shares and exchange rate dilemmas decline labour’s share of income in the national GDP, but if the capitalist economy invests in the home country or government invests in the manufacturing or construction industries than the labour’s share can be increased gradually. Since 1985 till 2000, the impact of trade openness was intense, but with industrial advancements input of labour share declined and this change produced a lower shift in the equilibrium of labour share (Milberg and Winkler, 164). In past 30 years overall economic insecurity in the business sector has increased this is mainly due to offshoring, but there are others factors like contemporary environment of global trade, industrial revolution, strategic management and allocation of efficiency and competitive markets. Blinder in his article sheds light on how Forrester Research accumulated that the global trend of offshoring will result in shift of employment (production and services) from USA to underdeveloped or developing countries for the sake of low cost labour and low cost production. According to him, this shift will take 3.3 million work positions from USA leaving a big gap of unemployment in the home country and consequently will develop apparent income inequalities (Blinder; Harrison and McMillan, 14). Conclusively, theoretical and empirical evidences discussed above suggest that offshoring is affecting employment and wage ratios in the home and host countries in a varied manner. Developed countries with their capital investments in host countries are creating short term employment shifts, which is causing joblessness in home country for the low skilled workers with reduction in their relative wages, but is increasing the demand of high skilled workers and their pay scale globally. This supply effect is also enhancing the productivity levels of advance economies and eventually these advance economies will be able to create more job opportunities in their regions and worldwide. Qualitative results show that low skilled jobs with low wages are shifted to developing countries and skilled jobs which are highly paid are shifted to developed countries, producing a huge income gap between both. Moreover, it has created income differences between high and low paid workers in developed countries and has increased the need of high-skilled worker. On the other hand offshoring has created many job opportunities in host countries. Yet, offshoring has exerted positive impact on international employment rate and exportation of jobs is a threatening challenge for the home country (Foster, 37). However, there is a dire need for the policy makers to produce more job opportunities for the low skilled workers, who have been affected by offshoring. Nevertheless, offshoring has deteriorated the status of working public in comparison to capitalist investors; income inequities will become more prominent in the upcoming years. However, offshoring has and will develop social inequities and will need a just judicial system/ national policy to maintain the equilibrium in labour and capital sectors. Work Cited Top of Form Hummels, David. The Wage Effects of Offshoring: Evidence from Danish Matched Worker-Firm Data. Cambridge, MA: National Bureau of Economic Research, 2011. Print. Gorg, H. (2011) Globalization, offshoring and jobs, in Making Globalization Socially Sustainable, eds. Bacchetta, Marc and Marion Jansen, World Trade Organization.Bottom of Form Top of Form Feenstra, Robert C, and Gordon H. Hanson. "The Impact of Outsourcing and High-Technology Capital on Wages: Estimates for the United States, 1979-1990." The Quarterly Journal of Economics. 114 (1999). Print. Bottom of Form Bottini, Novella, Christoph Ernst, and Malte Luebker. Offshoring and the Labour Market: What Are the Issues?Geneva: ILO, 2008. Print. Foster, N. Offshoring and Labour Markets. FIW., 2012. Gpo.gov,. 'Fdsys - Browse ECONI'. N.p., 2015. Web. 16 Jan. 2015.Bottom of Form Harrison, Ann, and Margaret McMillan. 'NBER Reporter 2011 Number 4: Research Summary'.Nber.org. N.p., 2011. Web. 15 Jan. 2015. Top of Form Foster, Neil. Offshoring and Labour Markets. Vienna: FIW, 2012. Print. Top of Form Blinder, Alan S. "Offshoring: The Next Industrial Revolution?" Foreign Affairs. 852 (2006): 113-128. Print. Görg, Holger, Ingo Geishecker, and Christiane Krieger-Boden. 'Services Offshoring Increases Wage Inequality | VOX, CEPR’S Policy Portal'. Voxeu.org. N.p., 2011. Web. 16 Jan. 2015.Top of Form Read More