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Unformatted text preview: ut many of the
jobs were “shipped” overseas.
Will these kinds of things happen in a free
global economy? Yes they will. In fact, they
have happened. Is this a personal tragedy for
some people, such as our software engineer
from Montana? No doubt it is. What happens to the software engineer is not the full
story, though. There is more to tell. Some Benefits
First, offshoring is not something that
only happens in the United States. Yes, U.S.
companies can and do hire individuals who
live in other countries. It’s also the case,
however, that foreign companies hire individuals who work in the United States. In
short, offshoring is a two-way street.
Second, offshoring often benefits consumers. How so? U.S. companies outsource
certain work activities only if it is less costly
for them to hire foreign labor than U.S.
labor (assuming the quality of the labor in
the two countries is the same). In other
words, the motivation behind offshoring is
the attempt to lower costs (and thus raise
profits). As we know from an earlier chap- ter, lower costs shift the supply curve (of the
good) to the right. Do you remember what
happens if the supply curve shifts to the
right? The price of the good will fall. In
other words, consumers will end up paying
lower prices. Opportunity Costs Play a Role
Offshoring is nothing more than those
persons producing things that they can produce at a lower cost than other people. It is
simply comparative advantage at work.
Looking at it this way sheds some light on
the case of the Montana software engineer.
When we last discussed her situation, the
job she was seeking had been offshored to
India. The reason: Indian software engineers
earn less than American software engineers.
But couldn’t the software engineer from
Montana have offered to work for the same
wage that the Indian software engineer
agreed to work for? Let’s say this wage was
$600 a week. The answer, of course, is yes. So
why didn’t she offer to do this? Why didn’t
she simply say that if the Indian software
engineer is willing to work for $600 a week,
then so is she?
The reason is because she must have had
a better alternative open to her than working
for $600 a week. If she didn’t, then she would
have offered to work for the same wage as
the Indian software engineer. In other
words, here is her priority list:
Section 1 International Trade 403 15 (390-427) EMC Chap 15 11/18/05 9:12 AM Page 404 income falls. And, as we said earlier, if the
company operates in a competitive environment—where prices tend to fall to a level
just sufficient enough to cover costs—then
we can expect a decline in prices to follow. These software
work for an Indian
that has about 300
clients around the
world, including U.S.
companies Bank of
Bank of America
and Citigroup have
chosen to offshore
these jobs, it
doesn’t necessarily follow that U.S.
software engineers have no jobs
at all. Explain. Top choice:
Work as a software engineer for $1,000 a week
Work at job X for $700 a week
Work as a software engineer for $600 a week
(which is the same wage an Indian
software engineer is receiving) She initially goes after her top choice and
learns that it is no longer open to her. She
doesn’t go for her third choice, though,
because she has a second choice that is better.
In other words, our software engineer from
Montana doesn’t choose to work at the same
wage as the Indian software engineer because
her opportunity costs are greater than his. We
are not suggesting that offshoring does not
hurt her. Her hurt comes in the form of earning $700 a week instead of $1,000 a week. It’s
just that now we understand her options are
not between (1) working for $1,000 a week
and (2) not working. Her options are between
(1) working for $1,000 a week and (2) working for $700 a week. In other words, her
options are not as black-and-white or as
extreme as we perhaps initially thought.
One final point to consider is that even
though offshoring lowers our Montana software engineer’s income by $300 a week, it
lowers the U.S. company’s costs by $400 a
week (per software engineer hired in India
instead of the United States). In other words,
costs of the company fall by more than 404 Chapter 15 International Trade and Economic Development QUESTION: I think part of this story is
unrealistic. You say that if the software
engineer from Montana wanted to work
for $600, she could have told the U.S. company offshoring jobs to India. Then she
would have worked at $600 an week. But I
have never heard of a person going into a
company and offering to work for the
same wage as a person in India, or China,
or any other country. Isn’t this unrealistic?
ANSWER: In a way, you are right. Very
few, if any, people will send the following
e-mail to the president of a company
that is offshoring jobs. Dear President:
I know you have been offshoring jobs to
India because you can hire labor in India
at a lower wage than you can hire labor
here in the United States. I also know that
the wage isn’t the only thing that...
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