Economics of Outsourcing

Interesting stats ... reprinted from a quiz on Yahoo Finance.

Each dollar that a US company spends on outsourcing a service job to India generates an estimated 1.13 USD in net value for the US, according to a recent study in the current edition of the Milken Institute Review (reg. req'd). The study also estimated that India gains 0.33 USD in net value from local wages, profits earned by local outsourcing companies and their suppliers, and taxes collected from all the local companies involved in the operation.

The net value generated by the outsourcing is returned to the US through several different channels. The outsourcing company can immediately recognize cost savings through lower wages, and many companies have seen additional cost savings from efficiency gains. US consumers benefit from the resulting lower prices. Outsourcing can also boost US exports to India, as the company builds the infrastructure to support the outsourced jobs. The Milken Institute points out, "A call center in Bangalore is likely to be filled with HP computers, Microsoft software and telephones from Lucent, and to be audited by PriceWaterHouseCoopers." The newly employed workers also have more money to spend on goods imported from the US. In 2003 the US exported 5b USD to India, an increase of 1.3b USD from the 2000 total.

While the outsourcing of jobs has become a hot-button issue for politicians and business leaders alike, a new study indicates that the actual impact on US workers is not as drastic as some may believe. A report by Lori Kletzer, an economist at the University of California Santa Cruz, studied the impact on American workers of non-manufacturing job loss due to free trade. Professor Kletzer found that between 1979 and 1999, 69% of US workers who lost a non-manufacturing job due to free trade found a new job within one year with an average salary equal to 96% of their prior job.