Arnold Kling  

Saving Jobs from Outsourcing

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Where are the Jobs?... Benedict Arnold Legislators...

Stuart Anderson looks at the arithmetic of Indiana's effort to save jobs from outsourcing.


Out of 65 contract employees, Tata would have employed a number of Hoosiers through an Indiana-based subcontractor, but would also have used Indians currently employed by the firm...let’s assume that the Governor’s action leads to hiring an extra 50 people from Indiana at the cost of at least $8.1 million for taxpayers (the difference between Tata’s bid and its nearest competitor). That would translate into Indiana taxpayers spending an extra $162,000 per worker

The state of Indiana probably is going to lose jobs overall because of its protectionism.

Thanks to Alex Tabarrok for the pointer.

For Discussion. Which government policies to limit outsourcing would not end up costing jobs overall?



COMMENTS (3 to date)
Eric Krieg writes:

Not entirely on topic...

http://www.forbes.com/home/2003/12/04/1204mckinsey.html

Interesting stuff.

Lawrance George Lux writes:

It will take comprehensive policies to save Jobs from outsourcing, without causing further loss of Jobs. My suggestion would be to force Businesses to pay alternate SS taxes on all Product intended to be sold in American markets, if they wish to deduct such Wages from their own taxes. lgl

gunjan writes:

Wow, such a a classic..

In the example above if 50 US workers were
simply given $100,000 salary gift for one year
by the Indiana government, without being
asked to do *ANY* work at all, and
(remember these are short term projects, so
one year is typical for such projects) for not creating a big deal about outsourcing,
and the project was still given to Tata, the
state of Indiana would still have saved 3.1
million dollars that it could have spent on
say improving high school science education
in Indiana, or reducing consumer tax by that
much amount !!!

An example of how lossful not choosing the
most efficient solution is.
In this example everybody
lost. And USA lost more than India. Tata (TCS)
will probably find something else to do
somewhere with the $ 15.2 million (the
actual value of the contract) worth
project resource it would still have
available that would have otherwise been
working for the State project, given the
high demand for Indian software engineers in
competing projects. TCS did not get the project,
the USA export to India probably declined by
4.7 million dollars costing 40 american
jobs (69% of software exports from India go to USA, so lets assume only 69% of this lost contract gets recovered by
TCS with another private American client,
so decline in Indias exports= 15.2x(1-0.69)= 4.7 million. Decrease in size of Indian economy
because of this, see below for detail= 4.7x7=
33 million. Decline in India's import of USA products= 33x 0.1= 3.3 million, as 10% of
India's imports are from USA. No. of USA
jobs lost because of lost demand for USA products in India = 3.3m/75k= 40 ($ 75,000 per american worker, typical salary of such workers in USA). Double whammy !! It all comes back to haunt you !

Total no. of American jobs lost because of the
decision of the State NOT TO OUTSOURCE = 100
jobs the first year (8.1 million $) and 40
permanent and growing jobs (because of growth
in export to India because of growth in India)
EVERY YEAR after 5 years in the future. This is
an approximation - too hard for me to put the
real integral for non-mathematicians reading
this to understand. So total loss of jobs
over the next 10 years = at least 140 per year.
Approx. no. of american workers that would be
employed by the USA company that won the contract
= 23 million/100k (including operating costs)
= 230 for 1 year= 230 manyears. Lost jobs over
the next 10 years by this decision = 100+40x5=
500. It is clear which one is more favorable..
No matter how you look at these even medium
term (5-8 years) negative consequences on the US
economy are very clear.

Not only did the state loose 8.1 million dollars
for no apparent reason, causing it to loose
100 american jobs immediately (equivalent money
that could have been spent by the state to employ
so many americans on other more productive projects), but also
future 40 more permanent jobs over the rest of
the country because of smaller growth of USA exports to India.

Loss of jobs for products and services that India
would have bought from USA, if these lost export dollars were available for India for economic
growth. Given that the Indian economy is
booming at 7% annual growth - and the effect of
every US $ in India is magnified 4-5 times
because of purchasing power parity difference,
in 5 years.

For every $ 1 that gets saved in the USA by
outsourcing, it also grows the Indian economy by
$ 7 (1x5x1.07 to the power 5= 7).
Since 10% of India's imports comes from
USA this leads to increase of Indian imports
from USA by at least $ 0.7, leading to the
creation of another $ 0.7 of export jobs in
USA.

As India gets richers this 70% ratio will
probably improve..

What USA should be trying to do is to boost
its exports to India to magnify this effect.
Also, it is possible to see if you understand
the above feedback mechanisms that work in
economics, that competition and efficiency
create jobs not take them away - it is not
a zero sum game, as many socialists who do
not understand much maths may make you feel !!

I apologize for the "english language"
presentation of economic feedback loops - how
they work. Its one of the only ways you can
communicate the idea to lot of people who are
trying to find a "blame-holder" for why they
lost their jobs.. unfortunately these short-
sighted but populist protectionist changes
in the US economy and policies are only going to
deepen the recession .. USA might go the Japan
way after all .. no longer the center for freedom
and oppurtunity thanks to these socialists !!

Gunjan

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