Globalization: Outsourcing and Offshoring Software Creation

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Recommended: Negative Effects Of Globalization

In recent years off shoring of high paying service jobs to counties such as India have received a lot of media attention. What are the long and short-term effects of these changes in terms of employment, income distribution and economic growth? Is the outsourcing of services a different phenomenon than simply importing steel?

Economic theory and past history point to the fact the trade provides net economic gains but if it also redistributes wealth, affects worker employment the short run and wages in the long run. It is easy to find literature that tells of the growth of the American economy with the increased use of outsourcing. It is however a different story when one asks the question who is reaping the benefit of the new lower prices of services received. As off shored services decrease the cost of doing business, the savings can go several places. One possibility is that the consumers will benefit due to lower prices for goods they want, a higher consumer surplus. Another possibility is that companies will have higher profits if they are in a monopoly market. This will result in gains for shareholders but no benefit to consumers. And of course the next effect of off shoring services can mean lower wages for workers in IT. This would be consistent with factor price equalization theory.

The initial impact of off shoring for a worker is that he does in fact loose his employment. If this is a highly trained and specialized worker then it will be impossible for him to find other employment at the previous wage with out specialize training and experience in the new field. The new market-clearing wage for him will be lower in the short term.

Off shoring has received much media attention due to the fact that the US e...

... middle of paper ...

...ation of food may make wages fall, but also the price of food will fall as well. If the workers buy enough food they are in fact better off. In the case of off shoring of software creation those who own the correct stocks will be better off.

Works Cited

Samuelson, Paul A. “Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization” Journal of Economic Perspectives –Volume 18, number 3 Pages 135-146

Mann, Catherine L. “Globalization of IT Services and White Collar jobs: The Next Wave of Productivity Growth” International Economics Policy Briefs December 2003 number PB03-11

Brainard, Lael and Litan, Robert E. “Offshoring Service Jobs: Bane or Boon and What to Do? ” The Brookings Institute April 2004 Policy Brief #132

Bookings Data Workshop: Services Offshoring: What does the Data Tell Us? Held on June 22, 2004

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