Zacks Equity Research blames outsourcing for Missing U.S. Jobs

December 30, 2010

While businesses are gaining ground and the stock market is picking up, job growth in the U.S. remains stagnant. What are the reasons behind this sluggish job growth?

In keeping with the economic cycle, the recovery is definitely powering job creation with a surge in demand for goods and services. However, the U.S. companies are hiring employees out of the domestic periphery to stay competitive. For most of the U.S. companies, international demand for goods and services is growing much faster than the domestic requirement.

According to The Economic Policy Institute, in 2010, U.S. companies have created 1.4 million jobs abroad, while less than 1 million jobs were created within the country. The senior international economist of the institute, Robert Scott believes that the U.S. unemployment rate would have reduced to 8.9% from 9.8% (the current rate of unemployment) had 1.4 million additional jobs been created domestically.

The Coca-Cola Company (NYSE: KO), DuPont Fabros Technology Inc. (NYSE: DFT), United Parcel Service Inc. (NYSE: UPS) and Caterpillar Inc. (NYSE: CAT) are among the U.S. companies that have created significant jobs out of the country in recent years.

Outsourcing: The Main Culprit

Since 2000, U.S. jobs have been moving overseas. Outsourcing and insourcing have eaten millions of U.S. jobs since then. As part of outsourcing, high-paying jobs have been creeping out to low-wage foreign countries. On the other hand, as part of insourcing, the nation has been importing lower educated foreigners who don’t mind working at lower-than-average U.S. wages.

Of late, outsourcing jobs have become more sophisticated than before. Higher-end jobs are now moving abroad as a result of promising growth in emerging countries like India, China and Brazil.

There is definitely a comparative advantage, but at the cost of domestic job improvement. Hence, though the economy is recovering, consumer demand has stayed restrained. Also, as the demand for goods and services in emerging and high population countries has grown radically, many of the products are not coming back to the U.S. As a result, U.S. economy is lacking a thrust.

The corporate executives and stockholders of U.S. companies are the primary gainers of this practice, as cheap and efficient labor help their companies stay competitive. The emerging countries also benefit from this as their rising unemployment issues can be addressed by additional U.S. jobs, to some extent.

However, the losers are the U.S. middle class families who are the job seekers. And even if they manage jobs from the few remaining ones; they are hired at effectively lower real wages.

This could be viewed as one of the major drawbacks of free trade. According to Nobel prize-winning economist Paul Samuelson, “There is nothing in the theory that says trade is always a win-win for every group.” Unfortunately, the U.S. is currently one of the affected countries.