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Source link: http://archive.mises.org/7927/downward-dollar-delivers-blow-to-outsourcing/

Downward Dollar Delivers Blow to Outsourcing

March 18, 2008 by

The slowdown of the American economy and the ensuing devaluation of the US dollar deliver gloomy headlines as timely as weather forecasts. The weakening currency may excite entrepreneurs anticipating increased exports. As well, it might have a stimulating effect for American professionals who are paid in return for our services.

However, the total effect is negative insofar as it will curb the trend toward the expansion of the international division of labor. Less outsourcing means higher labor costs for American business, which means less productivity overall. FULL ARTICLE

{ 18 comments }

Outsource the best thing for an economy. March 18, 2008 at 9:24 am

No-one has reported what I consider the worst effect of the depreciating currency on exporters. That is the increased cost of equipment and technology. These prices have increased only slightly less than the raw materials. Most people, especially those in government, have very little idea how much technology and equipment the US purchases from other countries. Although exporters may see a pickup their nirvana will be short lived as other countries buy the equipment and technology faster than the US exporters are able to do.

Anonymous Coward March 18, 2008 at 9:36 am

//The latest available data from US Citizenship and Immigration services (USCIS) indicate that there were 78,200 new H1B visas issued to professionals in Fiscal Year 2008 — a 40% drop from the 130,497 visas issued in FY 2004.//

This comparison might be misleading because the H1B visa cap was different in 2004 (195,000). It was reduced to 65,000 on Oct 2004 and still remains the same.

//Granted, there are many more candidates than there are visas available, but so far US companies are able to choose from the list of best qualified candidates.//
The H1B Visas are allotted through a lottery system when there are excess applications. The best might be left out due to this…

fundamentally the article is very true..
Thanks..

kharris March 18, 2008 at 9:51 am

“Less outsourcing means higher labor costs for American business, which means less productivity overall.”

This misses half the story, and assumes causation runs in only one direction. It also simply misstates one relationship.

Less outsourcing would happen because US firms face rising labor costs abroad, due to a weaker dollar. With the dollar weaker and wages abroad relatively higher, outsourcing is less prone to produce lower unit labor costs. Managers are choosing the lower unit labor cost environment when they choose not to export jobs in a weak-dollar environment. Hiring in the domestic market does not mean “higher labor costs for American business” in any meaningful sense.

As to the misstatement, it is the assertion that lower labor costs lead to higher productivity. That just isn’t true. Lower labor costs reduce the incentive to substitute capital for labor. Low labor productivity is easier to afford when labor costs are low. The US is a high labor cost nation and a highly productive nation because the two necessarily go together.

What the author may want to argue is that, to the extent that we export low-productivity jobs (which we are more prone to do when wages are relatively lower overseas), the result is to increase aggregate productivity. That is not because of some virtue working its way through the economy, but the purely mathematical result of subtracting low-productivity jobs form the average. The high end doesn’t need to become any more productive in order for the average to rise. That is a story of job loss at the low end, not an increase in the output of any given domestic worker.

JIMB March 18, 2008 at 11:12 am

Nice article. Some of the math needs updating:
….

Vicrant Dogra, a fellow Indian programmer, draws a line in the sand at a 20 rupees per dollar exchange rate — an additional 49% rupee rise

That would be nearly 100% rise in the value of the rupee (39/20-1), a drop of nearly 50% in the dollar.

Fewer skilled professionals are coming to America from Russia. The current exchange rate is 24 rubles per 1 US dollar. Compared with a 2002 benchmark of 32 rubles, it is a staggering 25% rise.

That would be 32/24-1 or a 33% rise in the value of the ruble, a drop of 25% in the dollar.

Shishir R March 18, 2008 at 12:20 pm

Perhaps, on the contrary, weakened dollar might result in “more outsourcing”. With the weakened dollar, the return due to outsourcing is reduced but still it is more profitable than employing american professionals. To get back the lost returns, more jobs might be outsourced.

I guess the day american companies stop oursourcing, they will be mowed down by the companies from other parts of the world simply because of the cheaper cost of labor.

PS: I am not a professional economist. My limited knowledge hails from mises.org resources :-) I would definitely want to take this opportunity to applaud the efforts put in by the folks here.

EnEm March 18, 2008 at 12:23 pm

“As well, it might have a stimulating effect for American professionals who are paid in return for our services”.

I do not understand this sentence.

“However, the total effect is negative insofar as it will curb the trend toward the expansion of the international division of labor”.

I am not worried about the international division of labor. I would speak from the perspective of rational self-interest and see if it these turn of events is beneficial for American labor.

“Less outsourcing means higher labor costs for American business, which means less productivity overall”.

Not necessarily so if the dollar is going to be cheaper. It is especially at times like these that American labor will begin to cost relatively lesser and conversely foreign labor would begin to cost more until the dollar bottoms out.

“Eventually with demand for skilled labor widely exceeding domestic labor supply, American companies turned for help to foreigners, particularly to Indian college graduates”.

I beg to disagree. American companies did not turn to foreigners for help. On the contrary, they created the situation and then proceeded to exploit that same situation which was to educate the foreign workforce through training and permissions to manufacture American brand name products under license. Creativity and innovation were thrown by the wayside while these countries became vast manufacturing plants. And now the chickens have come home to roost in the form of a foreign debt of 3 trillion dollars.

A weak dollar will cause an appreciable demographic shift, which is something I would very much like to see.

maru March 18, 2008 at 2:41 pm

Towards the end of his article, the Author wrote, in my opinion, Keynesian-style:
“The change in the currency rate is of course only a consequence of global economic development.”
I see this statement as higly obscure, even misleading — given the Austrian school’s fundamental explanation of the causes of inflation.

maru March 18, 2008 at 2:43 pm

Towards the end of his article, the Author wrote, in my opinion, Keynesian-style:
“The change in the currency rate is of course only a consequence of global economic development.”
I see this statement as higly obscure, even misleading — given the Austrian school’s fundamental explanation of the causes of inflation.

Allan Juranek March 18, 2008 at 2:50 pm

I disagree with this article nearly in its entirety. In defense of its thesis, it presents primarily anecdotal evidence. Furthermore, I do not see how a decrease in U.S. outsourcing results in a “total effect [that] is negative insofar as it will curb the trend toward the expansion of the international division of labor.” The international division of labor should remain as complex as it is now, but the flows of labor will just reverse at the margin. In other words, instead of U.S. jobs going overseas, overseas jobs will not tend to come to the U.S. Again, it doesn’t really seem that this contracts the international division of labor, the division is just dispersed differently.

Allan Juranek March 18, 2008 at 2:55 pm

“overseas jobs will not tend to come to the U.S.” should read “overseas jobs will tend to come to the U.S.”

I apologize for the error.

Nelson March 18, 2008 at 5:15 pm

“I am not worried about the international division of labor. I would speak from the perspective of rational self-interest and see if it these turn of events is beneficial for American labor.”

Inflation = lower real wages. How is that a benefit for American labor?

Labor itself is overrated anyway. Americans don’t want to “work for the man” because they love to work, what they really want is the benefits from working for the man (i.e., people don’t work for wages, they work for what the wages buy). Policy gets mangled when you confuse the two and inflation certainly doesn’t help people achieve their dreams.

John March 18, 2008 at 6:25 pm

Thanks for the article. If what you say is true, there is indeed a silver lining to the current economic slowdown. With the country swamped by immigration, it is refreshing to realize that at least the declining value of the dollar will have some good effect. With fewer immigrants to take jobs away from Americans at the same time imported goods become ever more expensive, perhaps we’ll see a recrudescence of the unique sense of nationalism that made this country great.

Nelson March 18, 2008 at 7:12 pm

“perhaps we’ll see a recrudescence of the unique sense of nationalism that made this country great”

Our “unique sense of nationalism” didn’t make this country great. Lots of countries are nationalistic and not great.

Our respect for individual freedom is what made this country so unique and so great. We’re not as free as we used to be in some areas and more free than we used to be in others, but we should never forget that freedom is our purpose and reason for existence.

billwald March 18, 2008 at 7:48 pm

WE will know the game is over when people in other countries start to complain about outsourcing to the U.S.

Christopher Hettinger (Telpeurion) March 18, 2008 at 11:04 pm

It really is wonderful, with Ron Paul came a whole bunch of Buchananites to Mises.org. Why are protectionists posting here?

In my opinion, most of the companies would rather cutback than deal with US restrictions, especially this year.

Prakash March 19, 2008 at 1:53 am

It is good that the fundamentals of economics of outsourcing are being considered here.

Though, there are a few points I would like to make as an Indian professional.

First of all, anonymous’s point is valid that it was the change in cap of h1-b visas that lead to the decrease in visas and not the lack of demand from India. The quota for H1-B filings for an entire year fills up in 2 days in India. There are NO H1-Bs LEFT ON THE TABLE.

There are many aspects to a life in the US, which are still much desired by the Indian professional. Clean surroundings, uncrowded cities, rule of law (especially traffic discipline),a sense of decorum from not having to bribe their way through every minor aspect of life. Development of the public sphere, infrastructure and government, is still very slow in India. These aspects may still balance out the decisions of many professionals even when the salaries start coming near purchasing power parity. Europe and Japan are not embraced to the same extent by Indians because of linguistic and cultural differences. The growing middle east economy may represent a new destination for white-collar professionals, but they are atleast 10 years away from developing a educational-corporate ecosystem that can rival the US. B.t.w.the persian gulf has always been a destination for Indian blue collar workers.

Just a few points to make here. Things are getting very interesting on this front! Countries are truly going to end up competing for professionals!

Prakash March 19, 2008 at 1:55 am

It is good that the fundamentals of economics of outsourcing are being considered here.

Though, there are a few points I would like to make as an Indian professional.

First of all, anonymous’s point is valid that it was the change in cap of h1-b visas that lead to the decrease in visas and not the lack of demand from India. The quota for H1-B filings for an entire year fills up in 2 days in India. There are NO H1-Bs LEFT ON THE TABLE.

There are many aspects to a life in the US, which are still much desired by the Indian professional. Clean surroundings, uncrowded cities, rule of law (especially traffic discipline),a sense of decorum from not having to bribe their way through every minor aspect of life. Development of the public sphere, infrastructure and government, is still very slow in India. These aspects may still balance out the decisions of many professionals even when the salaries start coming near purchasing power parity. Europe and Japan are not embraced to the same extent by Indians because of linguistic and cultural differences. The growing middle east economy may represent a new destination for white-collar professionals, but they are atleast 10 years away from developing a educational-corporate ecosystem that can rival the US. B.t.w.the persian gulf has always been a destination for Indian blue collar workers.

Just a few points to make here. Things are getting very interesting on this front! Countries are truly going to end up competing for professionals!

Deacon Elurby March 19, 2008 at 12:10 pm

Read and learn about the WHO, the HOW, and the WHY of America’s financial dismantlement:

Planned Destruction of America
http://planneddestructionofamerica.blogspot.com/

Corporate America: What Went Wrong?
http://corporateamericawhatwentwrong.blogspot.com/

Regarding the racial aspect of the destruction of America:

Magna Carta and Free Speech
http://magnacartaandfreespeech.blogspot.com/

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