Here she went to college thinking that a job would be

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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 engineers in Bangalore, India, work for an Indian software company that has about 300 clients around the world, including U.S. companies Bank of America and Citigroup. Because 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 Second choice: Work at job X for $700 a week Third choice: 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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This document was uploaded on 01/16/2014.

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