Limiting low-cost offshore labor doesn’t always create domestic jobs

In recent years, politicians around the world have campaigned on nationalist agendas with promises to “bring jobs home,” But plans to limit outsourcing may not work as intended, according to research from the UBC Sauder School of Business.

In their working paper, “Globalization of Work and Innovation: Evidence from Doing Business in China,” UBC Sauder Professors Jan Bena and Elena Simintzi are currently researching how access to ‘cheap’ offshore labor, due to the 1999 U.S.-China bilateral agreement, affected U.S. companies’ innovation.

Simintzi and Bena used the 1999 U.S.-China trade agreement as a starting point for their analysis. The agreement eased certain restrictions on U.S. manufacturing firms operating in China, increasing the potential profitability of those firms’ Chinese operations. Investment in automation at home fell 25 percent at firms which opted to offshore jobs. Investing in process automation simply wasn’t necessary, because it was cheaper to send jobs to China.

“It all comes down to cost. There are two main ways U.S. firms can lower their production costs: by substituting U.S. labor for cheaper, offshore labor, and by investing in the development of new labor-reducing technologies, such as automation,” said Elena Simintzi, professor in the Finance Division at UBC Sauder and co-author of the study.

That is why policies that restrict offshoring are unlikely to work. It’s more economical for companies to respond to limiting offshore labor by investing more in process innovation, such as automation, and relying less on labor overall.

The key takeaway from Simintzi’s and Bena’s research, however, is that neither cheap, offshore labor nor technology represent a “magic bullet” for the challenges manufacturers face today. Instead, employers need to invest both in training to produce skilled workers and in innovative technology that will help those workers do an even better job.

“Employee training programs that will allow manufacturing workers to replenish their skills is key for facing the challenges going forward,” Simintzi said. “Cheap, offshore labor or technology do not replace skilled individuals; on the contrary, technology is complementary to employees’ human capital.”

Her research suggests that technological change and globalization, the two main forces that drive rising inequality in developed economies, are interconnected through corporate investment. Policy and tax initiatives that make it tougher to access cheap, offshore labor simply create incentives for firms to develop automated solutions that allow them to use fewer employees.

“What we are contributing to this debate is that solutions that seem obvious at first may have unintended consequences that will make them ineffective, and may have other detrimental effects, too. Specifically, restricting offshore labor may fail to create domestic jobs, and, at the same time, it will hamper benefits that globalization brings about, such as the large variety of inexpensive goods everyday shoppers are accustomed to in the developed world,” explained Simintzi.

The bottom line is that public policy needs to more thoughtfully address labor market challenges and income inequality in order to be truly effective, said Simintzi. And those policy initiatives need to be coupled with investment in employee training and development to create more opportunities for skilled workers to thrive alongside advancements in technology.