Outsourcing/Offshoring

OUTSOURCING REFERS TO two different practices of Western business, only one of which has a significant effect on the number of people living in poverty. Contracting out is a practice by which businesses contract with local firms that supply temporary workers (called contractors or temps) to satisfy a portion of their staffing needs instead of hiring the extra workers as employees.

For the individual business, benefits of contracting out are increased flexibility in staffing because temp workers can be let go without cause at any time; lower administrative costs because temp workers get no employee benefits from the hiring firm; and presumed greater productivity both from the temps, who know they could be fired at any time, and from the company's employees, who fear being replaced by temps.

The main cost is lower-quality work because temp workers lack experience with the company's products and have no more loyalty to the company than the company has to them. However, the wages paid to temp workers are not always dramatically lower than they would earn as employees, so contracting out per se has little impact on poverty rates.

Offshoring (outsourcing on an international scale) is a practice by which businesses either contract out some work to firms in foreign countries with lower wages and costs of living or else relocate their productive facilities to those countries. As with contracting out, the result is that businesses need fewer employees domestically, but offshore contractors sometimes produce work of inferior quality, as mentioned by O. Kharif.

Offshoring has an additional social cost in that at least in the short term, it causes a net loss of jobs and productive capacity in the country from which off-shoring is done. There is also some evidence that off-shoring leads to long-term decline of the economies that practice it, but this is less certain and is disputed both by offshoring's advocates and by mainstream economists.

Offshoring takes different forms, as described by J. Bhagwati et al. It can be an “arm's length” purchase of services that would otherwise be bought domestically, it can be an arm's length purchase of services that would otherwise be performed by a firm's employees in its host country, or it can be a firm's relocation of its productive facilities to a developing country where wages and factory costs are lower.