Outsourcing and the International Market in Highly Skilled Workers--Posner's Comment

"Outsourcing" is a form of vertical "de-integration." "Vertical integration" refers to the form of business structure in which a firm owns a supplier or distributor rather than buying (from the seller) and selling (to the distributor). Hierarchical direction within an organization is substituted for contracting for output. The tradeoff is between the agency costs involved in directing people’s work and the transaction costs involved in arms-length contracts. As markets grow, enabling greater specialization, there is a tendency to de-integration; vertical integration is attractive when the market for an input is so limited (maybe to just a single firm) that the supplier faces monopsony, which integration overcomes. Outsourcing is famously illustrated by IBM's decision to outsource the production of the operating systems for its computers to Microsoft; previously IBM made the operating systems itself. As this example shows, there is nothing in the definition of outsourcing to connect it to foreign commerce. But the current anxiety about outsourcing focuses on the outsourcing of software development and other high-tech services to foreign nations, particularly India, and hardship to American skilled American workers whose jobs are outsourced. Oddly, Americans who are opposed to free trade don't mind as much when Americans buy from foreigners as when they hire them, though the effect is the same. If Microsoft purchases software from an Indian company, the effect on American jobs is no different than if it hires Indian software engineers to work for Microsoft in India--or, for that matter, in the United States. If the latter arrangement is preferred, it makes no sense for Congress to make it difficult for American companies to hire highly skilled foreigners to work in the United States. In any event, the harder it is to obtain visas for highly skilled foreigners, the greater the incentive to outsource production to those highly skilled foreigners in their native lands. So restricting visas seems a futile measure for trying to protect American high-tech jobs. The obvious difference between outsourcing and importing labor is that the foreign immigrants would command higher wages in the United States than in their native country. But they would also be more productive, because they would be working side by side with their American colleagues. Despite sophisticated video conferencing, face to face interactions are still considered highly important to productivity. It is the low wages in countries like India that makes outsourcing so attractive, but as Becker points out, U.S. and other foreign (foreign to India, that is) demand results in bidding up the wages of highly skilled Indians in India, which acts as a brake on outsourcing. It could be argued that outsourcing high-tech jobs creates human capital in the outsource nations, like India, and that the result may be greater competition from the high-tech sectors in those nations in the future. A U.S. company might not take this effect of its outsourcing into account in deciding whether or how much to outsource, because of free-riding problems. Its forbearance to outsource would benefits its competitors, but it would not be compensated by their for conferring the benefit. If this is a concern, it argues for relaxing visa restrictions on high-tech foreigners, since once established in the United States they are unlikely to take the skills they learn here back to their native country. Some will, but most will rapidly become assimilated Americans. However, there would be no externality if the foreign workers in their outsource jobs pay for their own training in the form of accepting lower wages. The costs of outsourcing are concentrated on Americans who lose their jobs or are paid less because of outsourcing to foreign countries, and the benefits, though they probably exceed the costs, are diffuse. The benefits in the form of consumer surplus and greater labor demand (but not necessarily in the jobs that are outsourced) in the United States as a result of the reduction in costs that the outsourcing firms experience as a result of outsourcing--if there were no net reduction in quality-adjusted costs, there would be no outsourcing. When the costs of a policy or practice are concentrated but the benefits diffuse, there is an asymmetry of political pressure, and this may explain the visa resterictions. But from a neutral standpoint of aggregate (and average) economic welfare, there is no compelling case for limiting outsourcing--or for stinginess in granting work permits to highly skilled foreigners.

Comments

[sxk]

Agreed. Removing labor limits will establish an inevitable equilibrium between jobs here and those that are outsourced. This will reduce the risk of flight of jobs to low-wage countries purely out of cost considerations.

PS- I don't see Dr.Becker's post yet.

[Lawrence Indyk, University of Kansas School of Law]

To mitigate the concentrated effects of outsourcing on certain layed-off employees the U.S. government has grant and retraining programs to ease the transition on those who would be most effected. These programs might be moderately effective in the case they were designed for - that is, low-skill, low-pay, factory labor, where learning another trade would not require a long time and a small subsidy may adequately compensate for small wages.

But the case of high-skill, high-pay professionals is different for each factor. Perhaps unemployment insurance is the only adequate program for these workers.

[jimbino]

Posner says,

"If Microsoft purchases software from an Indian company, the effect on American jobs is no different than if it hires Indian software engineers to work for Microsoft … in the United States."

I heartily disagree. If all of IBM were outsourced to India, we would indeed effectively be outsourcing American jobs, but they would be jobs of CEO, engineer, secretary and janitor—a broad spectrum of jobs, not even considering the broader spectrum of jobs that include the nurses, cooks and clerks to service all those employees. However, when we allow H1-B visa holders to compete specifically with American hi-tech workers, we are effectively targeting the hi-tech worker for reduced wages or job loss, while at the same time improving job prospects for every other worker in the country. I don’t know about you, but targeting me for attrition calls for me to think about practicing some hi-tech attrition of my own.

Don’t they ever let economists get out and walk around some?

[Nelson]

However, when we allow H1-B visa holders to compete specifically with American hi-tech workers, we are effectively targeting the hi-tech worker for reduced wages or job lossHi-tech work can be done anywhere in the world. It's not a matter of "allowing it" unless you're talking about genocide against foreign hi-tech workers, which I hope you're not. By keeping hi-tech workers out we're effectively saying "go do it somewhere else." It would be much better to do the work here and receive the benefits of consumption, taxes and learning from each other that residency offers us.

[Chris]

Judge Posner,
I agree with you that the view of those who support freer trade but not more open immigration policies is illogical, but I cannot help disagreeing with the idea that “the effect is the same”. When the United States enacts policies which create a double standard in which we allow the relatively free trade of goods and services (NAFTA, CAFTA, etc.), but not free immigration we invariably lose some production—that is the recognized cost of business when markets liberalize. Failing to take advantage of the human capital available to us by keeping out well-qualified workers, however, exacerbates this problem in a way that the opposite combination (open immigration and more protected trade) does not.
By paying the cost of liberalization, but denying ourselves the rewards in the form of the skilled labor from other nations, we actually incentivize outsourcing high-skill jobs to foreign countries. As companies face more difficulty finding high-skill workers in the United States, the cheaper labor available in foreign countries (which we refused to let in) provides a compelling alternative. Critically, when the companies hire foreign workers in foreign countries the supply of money domestically held decreases, slowing the economy. If we hire a worker from a foreign country to work in the United States, however, a more substantial portion of their income remains in the United States (even if they send all disposable income home, they still need food and shelter).
Consider the mirror of that scenario—a more protected economy with open immigration which, while still not optimal, can pull human capital from foreign nations in with the promise of higher pay (which the United States could still offer, even in a more protected economy). This creates more competition in the job market and forces some innovation on the part of these workers. While still less than optimal, even this type of policy is preferable to our current system.

[jimbino]

Nelson is total wrong, of course, in his sNelson is total wrong, of course, in his assertion that hi-tech work can be done “anywhere in the world.” Anywhere in some other world, perhaps, but not in our world where the wage-multipliers like investment in capital and research are chiefly in the United States. And does he imagine that Google can just move its servers to India? And I’d like to see an embedded software engineer in India test his software on a prototype located in Cedar Rapids.

Sure, we could imagine a world in which Cedar Rapids were in India (not a bad idea), but lots of hi-tech work can nowadays be done only in the USSA. Indeed, if I could do my work in other countries, I'd be out of Amerika in a flash!

[Watches]

Yes microsoft is moving it's R&D dept to Canada because of issues in the USA i think that for R&D the main flow should be toward innovation and not language!

[Robin 'Roblimo' Miller]

I just got some quotes from friends of friends in Delhi and Bangalore for some Web coding and design work, and their bids were just barely competitive with local designers and coders here in Bradenton, Florida.

India is no longer cheap. Other countries may be, but I need to save at least 50% off *small-town* U.S. labor costs to make the inconvenience of offshoring my work worthwhile.

My end solution = more automated Web site production, with better software tools, done locally.

I'm a small-timer, not an IBM or Microsoft that can afford to spend millions on experiments that might or might not work. When I spend a dime, I need to get back 11 cents (or more, hopefully a LOT more) or I go broke. :)

[Edward]

"Americans who are opposed to free trade don't mind as much when Americans buy from foreigners as when they hire them, though the effect is the same."

I'm not sure who you could be referring to here. I think most people who oppose free trade understand this simple calculation. The proof would be that companies like Walmart, who buy practically all of their products overseas, are more vigorously opposed than Microsoft.

[Anonymous]

"Americans who are opposed to free trade don't mind as much when Americans buy from foreigners as when they hire them, though the effect is the same."

I'm not sure who you could be referring to here. I think most people who oppose free trade understand this simple calculation. The proof would be that companies like Walmart, who buy practically all of their products overseas, are more vigorously opposed than Microsoft.

[Anonymous]

thanks all
ÿßÿ®ÿ±ÿßÿ¨

[Anonymous]

Nice article!

[Anonymous]

thanks
بنت الزلفي

[Anonymous]

شات سعودي

[Anonymous]

العاب
___
ÿ¥ÿßÿ™

[Anonymous]

ÿßÿ®ÿ±ÿßÿ¨
___
دليل

[Anonymous]

Thank you, you always get to all new and used it
شات صوتي

[Anonymous]

ÿØÿ±ÿØÿ¥ÿ©
___
صور

[Anonymous]

Thank you, you always get to all new and used it
ÿ¥ÿßÿ™

دردشه

[Anonymous]

Perfect work!

[Anonymous]

I bookmarked this link. Thank you for good job!

[Anonymous]

Very interesting site. Hope it will always be alive!

[Anonymous]

thanks to tell me that,i think thats so usefully----
tiffanys
links of london

[Anonymous]

Very interesting site. Hope it will always be alive!

[Anonymous]

دردشة برق

دردشة الخليج