Is outsourcing our jobs creating a huge negative externality?

Question

Isn't an unemployed person a large burden for society

Answer 1

No, in fact you could argue that it is a benefit for society. The person is worse off in the short run, but may well be better off in the long run. And, unemployment is not an externality unless you are a politician up for re-election. It is simply a natural variable in the system. An excellent argument can be made that outsourcing adds long run employment at higher real wages. It increases competition, which requires that existing workers improve their quality in order to keep their employment, making firms even more competitive, allowing the remaining workers in the nation to keep their jobs and get pay increases. The burden of unemployment at any given moment is far less than the benefit to the remaining society.

It is only in the extraoardinary cases of market failure, such as the Great Depression, where unemployment is a negative outcome as a whole and is a burden. The Depression however was not from competition, but from rigidities in the system.

The reason German unemployment is so high is that the German system has become rigid and does not permit people to be fired. As a consequence no one will hire an additional worker because they need to make due with the smallest number possible as you cannot reverse a hiring decision by law.

Protectionism and any form of nominal rigidity is the enemy of the worker as it guarantees the eventual destruction of wages and jobs for some multiple, sometimes very large multiple, of the protected group. Even then, often the protected group still ends up losing their employment.

Answer 2

Outsourcing does create an external negative, but that is more than countered by the larger value of jobs in-sourced. It tends to be the lower-skilled jobs that go overseas first, and the high-skill set returns.

Of course unemployment is a burden. But those with rising incomes tend to outspend the unemployed, so in the aggregate the numbers look better. But tell that to the guy in the unemployment line.