Outsourcing

1. Outsourcing Econ. Mr. Odren

2. What is Outsourcing? • Is not the same as Globalization; however, it is one aspect of it. • Contracting out of an internal business process to a third party organization typically for a lower labor costs. • Hiring foreign laborers to perform the same job that had previously been held by an American.

3. Why do Businesses Outsource? • Increase the amount of laborers at cheaper rates • Increase laborers = Increased productivity • Gives business advantage over competitor companies • Tax benefits – Poorer (3rd world countries) welcome big businesses to boost their countries economy. As an incentive, they offer tax breaks (lower taxes) to those businesses that outsource to their country. • It is all about saving MONEY!!! • Why is Wal-Mart able to offer such cheap prices? Next Slide… • Allows companies to lower the prices on goods.

4. Example: Wal-Mart • Why does Wal-Mart have such cheap prices on their products? Hint: where are most of them made?

5. Effects of Outsourcing on Microeconomy • Helps companies maximize profits • How? • Outsourcing cuts costs of wages employers have to pay employees thereby allowing them to charge lower prices on products • Example, Foreign labor ($.50) vs. American labor at $7.25 per hour. Delaware raising minimum wage to $8.25 next year.

6. Effects of Outsourcing on the Microeconomy 2. Smaller companies (mom and pop shops) that cannot afford to outsource products to/from America lose money. • Why • If smaller companies do not outsource, they cannot afford to lower the prices of their product • 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 at Wal-Mart (or Target, Kmart, etc.) have “forced” many smaller companies to close because they could not compete with Wal-Mart’s low prices…. all because of outsourcing. 3. Big Companies Win/Lose, Consumers Win/Lose, Small companies Win/Lose, American workers Win/Lose because of Outsourcing.

7. Is Wal-Mart bad for the MicroEconomy? Why or Why Not? • Your thoughts!!

8. Effects of Outsourcing on the Macroeconomy • Offshore investment – spending money for your business in other countries instead of U.S. • Good for Global economy Why? Helps boost the economies of poor and underdeveloped countries b) Not good for the American economy Why? Takes money out of U.S. economy • By 2015, estimated 3.3 million jobs from the U.S. will be outsourced • This will generate $136 billion in wages for OTHER COUNTRIES!

9. Effects of Outsourcing on the Macroeconomy • Creates more competition for lower paying jobs in the U.S. • Outsourcing affects jobs such as telemarketing, human resources, information technology, and other white collar jobs. • 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. Example

10. Effects of Outsourcing on the Macroeconomy • Explain the irony (The expression of one's meaning by using language that normally signifies the opposite, typically for humorous or emphatic effect) in this quote. “United States businesses outsource so many jobs that one day the creator of outsourcing will have his job outsourced as well. Only then will big businesses understand the horrible effect that outsourcing has on the U.S. economy”

11. Effects of Outsourcing on local economies • Creates a domino effect for related companies Example: Newark Chrysler plant closes. Leads to direct loss of jobs, but also causes less revenue at local sub shop, auto mechanic shop, restaurants, etc. causing them to lay off employees who now spend less continuing the domino effect.