Outsourcing and Offshoring: Sector Implications for Dynamics, Growth, and Sustainability

As national economies have integrated through removal of trade barriers, the potential for offshoring production was quickly recognized as a strategy to enhance firm performance. At the same time, labor market reforms opened the door for outsourcing of labor services to specialist firms that supply labor force teams. The implications of these trends for industries that rely on specialized workforces have drawn considerable attention. Both manufacturing and food processing have seen substantial movement toward oursourced labor, yet little research has considered the implications of these trends. In both manufacturing and food processing, specific labor skills are needed that require training and consistency of supply to ensure efficiency in raw material and plant capacity utilization. Hiring from local labor force in the short-run involves search, training, and adjustment costs. In the longer-term, a sustainable labor pool must be developed and nutured. Hiring through outsourced labor services firms involves a distinctly different cost structure and longer-term dynamics play a different role and performance for the employer as well as the local labor force. Individually, firms face a choice between hiring from a local labor force or outsourcing that task to a specialist firm. Within a labor market, firms competing for labor from the same pools have joint interests in maintaining a sustainable labor force while they compete to fill their demands. However, as some firms initiate use of outsourced labor, the local labor force may be impacted. This issue has not been considered and is taken up by this paper. The paper presents a microeconomic model and uses simulation to evaluate the implications of increased labor service contracting on sustainability of the local labor force. In particular, our results show that as contracted external labor increases, the local labor pool decreases and search costs increase rendering local labor at less attractive choice for employers. A threshold is identified in terms of extent of local labor employment at which the viability of local labor employment collapses. We show that even before this threshold is met, the labor force benefits of the location vanish, reducing the locational rationale for the employer to natural resource access, output market proximity, and fixed investments in plant and equipment. The marginal benefits of the location based on these factors may then be outweighed by those available at other locations and the firm may relocate. We conclude with consideration of implications for labor force policy targeted at sustaining particular industries.