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Offshoring which is sometimes known as outsourcing is a situation where by firms moving away from their countries to other countries with an aim of getting cheaper labor and better terms of trade (Tjia, 2005). Firms in the United States have been observed to have this tendency and therefore pose a bigger threat to the development of the economy. The employment in the USA especially in the manufacturing sector has dropped steadily since 1990. This means that the human resource in the United States has not been fully utilized. Tjia comments vividly that manufacturing is the most affected sector with many of the firms moving to countries like China and even Japan.
It is very fundamental to note that the backbone of this economic hitch is the high wage rate in the US. The law of labor productivity requires that workers should always be paid the value of their marginal products of labor. The aim of any business firm is to maximize its profit and to minimize the costs. Therefore, these firms in the United States would actually minimize their costs by moving to areas with very cheap labor. A study in University of California shows that almost 14 million jobs in the United States are affected by offshoring (Mary & Wei, 2004).
The following are the policies that I have recommended to the President of the United States for action so as to eliminate this phenomenon. Firstly, the government should give subsidies to firms in the affected sectors. These subsidies will play a peculiar role in motivating firms to operate in the United States. For example, the government can subsidize the firms’ expenditure in inputs like machines. This would reduce operation costs of the firms and hence help them to maximize profit. I therefore recommend subsidizing of the firm’s inputs as a fundamental policy.
Secondly, reduction of taxes charged the manufacturing firms is also a magnificent policy that I recommend to the President for action. As mentioned earlier, the ultimate aim of any firm is always to maximize profit at the lowest costs possible. Reduction of taxes would motivate the firms to operate in the United States. This reduction in taxes would result in a significant improvement in the net profit of the firms. Consequently, the level of unemployment would reduce since the firms would have to employ citizens from the USA (Tjia, 2005).
Thirdly, the government should also own firms in the affected sectors through nationalization of the firms. This would comparatively mean that the government would now employ the jobless citizens in those industries. Even though this policy seems to be expensive, it is the best. The government should also enact a law that limits the companies’ imports in terms of outsourcing as an aim to reduce the goods brought in due to offshore and/or outsourcing in other countries. This policy would automatically stop the investors from outsourcing in other countries since they would now be guided by specific rules and regulations. The government should also attract international investors to invest in the country. This would be done through the sourcing and back shoring. The companies would only invest if the market is favorable in terms of tax. The government should also ban companies who have moved offshore from getting government contracts and tenders. This would limit movements of the companies to other countries.
Why offshoring and outsourcing is a problem
The setback that is associated with this phenomenon is a rapid increase in the levels of unemployment witnessed in the United States. This has been accompanied by high rates of lost job growth (Besse, 2006). I must also state categorically that outsourcing also has a threat of reducing employment opportunities in the technical fields like manufacturing and even information technology. This reduction in employment can have a severe impact on education level by reducing university enrolment of students into these particular fields. This would in turn reduce human capital in the nation. Outsourcing by firms also has a threat on multifactor productivity of firm that offshore. The measurement of multifactor productivity requires that detailed data of purchased inputs must be available for computation. This data is always very difficult to obtain by the firms that outsource. It is therefore very difficult to compute their multifactor productivity (Tjia, 2005).
Outsourcing also has effect of stagnating the US wage rates due to high demand for the few available jobs. These firms would end up cutting the workers’ benefits so as to remain more competitive in the market. I must comment vividly that this phenomenon discourages workers and renders them unproductive (Tjia, 2005). It has also been noted that there exists mismatch in terms of jobs. This has been impacted by mobility of workers from more competitive fields to less competitive ones irrespective of intellectual qualifications (Besse, 2006). This, apparently, may seem to sweep under the carpet while the destabilization of the balance in payment is the most visible .
Why the government must consider these policies
It is vivid that outsourcing results in high level of unemployment. Unemployment as a macroeconomic factor that affects the country’s economy by reducing human capital. The United States as a super power country must show its vigor by having the ability to manage the economy’s human capital. The President of the United States must consider these policies so as to remain globally competitive in terms of innovation and technology. It is clear that the rate of outsourcing in manufacturing and information technology firms to China and Japan is the reason why these countries enjoy high levels of technology and innovation. This is a great global challenge to the United States as a powerful country. (Mary & Wei, 2004)