The Social Implications of Outsourcing

Before I get into the meat of my post I need to define my terms. “Outsourcing” doesn’t mean a helpdesk in Bangalore or importing foreign workers to do the same jobs as were done by Americans at a lower wage. It just means hiring people who aren’t company employees to do something. For example, none but the very largest companies have had legal departments for generations. They outsource their legal services to law firms.

It’s a widespread misconception people are paid commensurately with what they bring to their jobs, with their efforts, and to what they produce. That Horatio Alger narrative is nice to imagine but it’s just not the way things work in practice. In practice the very best, hardest working janitor for Goldman-Sachs makes about the same as the worst, laziest janitor there. Pay is proportionate to the pay of other workers you resemble superficially. There may be some pressure at Goldman-Sachs to pay their janitors more (or less) than the janitors at smaller, poorer companies.

At Quartz Allison Schrager considers that social influence on wages and the implications that widespread outsourcing has on that. She calls it “workplace fissure”. What if all of the workers at the company for which you work have low pay?

Research by economists Larry Katz and Alan Krueger has explored the trends in alternative work arrangements like these (pdf). They estimate that non-standard employment (gig work, temp work, contractors) accounted for a around 10% of American workers between 1995 and 2005, but grew to some 16% of American employment in 2015. Much of the increase is attributable to “workers provided by contract firms.”

Fissure can explain many of the things that people worry about when it comes to the economy. In the past, companies couldn’t get away with paying a janitor that much less than the CEO. A janitor employed by a big bank might make $60,000 a year. Now, if the bank hires cleaners through a contractor, those people work for a firm full of other cleaners, not one that’s a mix of bankers, traders, coders, and the like. As a result, there is less pressure to drive up their earnings, so they might make $30,000 instead.

As she notes this “fissure” is just the workings of a competitive economy. As Adam Smith noted 300 years ago specialization is the key to efficiency. But it does have social and economic implications.

2 comments… add one
  • Guarneri Link

    Two Goldman janitors have a hard time generating a wide range of value add. I guarantee you two bond traders trading the firms capital with large return variances have large pay variances.

    We use very little outsourcing, so my experience is limited. But we generally do it when we can’t provide a full time job, not for pay advantages. Further, I strongly suspect an exceptional [whatever] will break away from an outsourcing firm in short order and break the paradigm. Good employees are just too hard to find and pass on. However run of the mill employees no doubt have become lower paid plug and play types.

  • Two Goldman janitors have a hard time generating a wide range of value add. I guarantee you two bond traders trading the firms capital with large return variances have large pay variances.

    It’s not just true of janitors. It’s true of nearly all jobs at most companies. I’d bet that the difference in pay between those two bond traders is not between their salaries but defined by commissions or other IB. Very few people are on any form of IB.

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