Are claims about the positive economic effects of offshore outsourcing for the poor and middle class of the outsourcing country verifiable?

The main argument for Offshore Outsourcing, is the common economic justification that "a rising tide floats all boats". By outsourcing jobs to countries with cheaper labor markets (and/or cheaper currencies?) the outsourcing entity now has more money to spend on better jobs or on other economic activities like reducing prices. Not to mention that it appears that this also improves the standards of living in the countries that receive the outsourced jobs (but that's not the focus of this particular question).

One major criticism of this concept is that it does not appear that those whose jobs are displaced ever receive a net benefit from outsourcing.

Also some have suggested it is unclear whether or not the poor and middle-class in the outsourcing country are ultimately economically affected positively or negatively.

Is there any economic data that directly supports whether Offshore Outsourcing ultimately improves the lives of the poor and middle-class in the outsourcing country, at least from a standard-of-living perspective?

  • I for one I have never heard of such claim, can you reference where it's documented? – Sklivvz Mar 13 '11 at 19:24
  • @Sklivvz - I'm sorry which claim are you referring to? Hopefully I can add more references. – Mark Rogers Mar 13 '11 at 19:26
  • @Fabian - while my title is problematic because it is so long, I believe your version of the title ultimately reduced the quality and focus of the question. I'm asking about a specific effect of offshore outsourcing rather than about the general effects of outsourcing. – Mark Rogers Mar 13 '11 at 19:29
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    I would like to have some explicit example of the claim that " the poor and middle-class in the outsourcing country are ultimately economically affected positively" for example – Sklivvz Mar 13 '11 at 19:33
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    I don't see why that would be needed to justify outsourcing. Companies only answer to their shareholders (who like larger margins). – Sklivvz Mar 13 '11 at 19:35

Short answer: In the short to mid term, poor and middle class in the outsourcing country do poorly. Ultimately, there may be a sufficient gain for the overall economy that everybody wins, but if demand for low-skilled labor is limited, it may take a long time till "ultimately".

On an individual level, the question is, unfortunately, very difficult to answer. You would need to have access to the employment history of a large number of people in order to make any significant statement. Such data simply do not exist.

One recent study (Autor, Dorn, Hanson: "The China Syndrome: Local Labor Market Effects of Import Competition in the United States" (pdf); see also the article about it in WSJ) has looked at the effect of imports from China on local US labor markets: What happens to a local labor market when the country is importing lots of products that were traditionally produced by the local labor market (commuting zone, CZ)?

Our results suggest that the predominant focus of the previous literature on wages misses important aspects of labor market adjustments to trade. We find that increased exposure to low-incomecountry imports is associated with rising unemployment, decreased labor-force participation, and increased use of disability and other transfer benefits, as well as with lower wages, in affected local labor markets. Comparing two CZs over the period of 2000 through 2007, one at the 25th percentile and the other at the 75th percentile of exposure to Chinese import growth, the CZ at the 75th percentile would be expected to experience a differential 4.5 percent fall in the number of manufacturing employees, a 0.8 percentage point fall in the employment to population rate, a 0.8 percent fall in mean log weekly earnings, and increases in per capita unemployment, disability, and income assistance transfer benefits on the order of 2 to 3.5 percent.

Interestingly enough, they find that while wages in the directly affected industries are stable, wages of other low-income jobs decrease, because companies lay off the less critical workers first, who then have to find something else in a different sector. Thus, at least in the short to medium term, life gets worse for the majority of low-income workers when people are laid off, even those who weren't working in the affected industries.

The study cannot differentiate whether the job losses are due to companies shifting manufacturing overseas, or whether they are due to Chinese companies simply outcompeting US companies, but for the purpose of the article in the OP, the US should be benefitting in both cases.

Along with the increase in unemployment, there is a rise in disability benefits, since people who may otherwise prefer to hold a job fall back onto whatever is available to keep them afloat. Since these benefits ultimately have to be paid via taxes, the authors of the study can estimate roughly how much the US is spending vs gaining from imports from China, and they come to the surprising conclusion that

The deadweight loss of financing these transfers is one to two-thirds as large as U.S. gains from trade with China.

In the long run, the US either finds a way to generate jobs for these people, or it will lose importance as an economic superpower. However, in the short run, the effect on low-income workers are not that great, and the gains for the overall economy, which may or may not trickle down to the low-income workers, aren't quite as amazing, either.

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