Outsourcing jobs – whats the issue?
Posted April 18, 2008on:
The Standard has taken issue with this activity. Particularly, two posts at the Standard lamented the “exploitation” of foreign workers and stated that consumers should stand up to protect domestic jobs.
On a separate note we have seen the closure of a Dunedin knitwear company at the same time, while the D&B payment survey shows that manufacturers are taking a long time to pay their bills, taking 53.6 days on average (can only find old one 😛 ):
What do these stories have in common other than the sad fact of job losses? What do these stories tell us about the New Zealand economy?
I’ll look at this situation with ANZ removed. These jobs are an outsourcing of office work, something that is becoming increasingly prevalent among banks. Furthermore, there is no direct reduction in the number of ANZ employees – the reduction comes from a lower level of additional employment in NZ in the future.
So looking at the other stories we have a picture of manufacturing. Immediately everyone will jump on the exchange rate and interest rates – stating that they are killing our manufacturing industry. However, I’d say something a little different – our manufacturing industry is shrinking because large parts of it involve areas where we don’t have a comparative advantage.
Notice that Fisher and Paykel said (amongst a tirade of excuses) that they were moving because labour is cheaper overseas. Now either this will be an area where countries overseas have a true comparative advantage, or as firms move overseas, the wage rate overseas will increase to remove this incentive for firms in the future. Notice, this isn’t exploitation. As long as there are appropriate social structures (something that is improving all the time in developing countries) demand for labour will lead to higher wages for these people – why are we criticising movements that will help people that are truly poor?
Furthermore, the upside from this cost cutting will be lower appliance prices for consumers, something that is good for everyone.
As New Zealand is at a comparative disadvantage in many types of manufacturing activities, the allocation of resources into these industries is inefficient. This might sound cold, but surely the ultimate goal is for workers and our other resources to flow into industries that give us the highest return. By using resources efficiently, we increase national income, give the government more money to spend on improvements, and give people more life options.
Now I realise that the people that lose their jobs won’t give a crap about this – and everyone here feels bad for them. But this is where the government can truly help the labour market, by helping to match employers and employees and aiding the appropriate training to get people back into the workforce. Although some of the regulatory burden is an issue for NZ’s competitiveness It is a credit to the current government that they have introduced labour market policies that try to solve these problems (although some commentators seem to want to give them all the blame).
What about the short term?
Moving back to a short-term focus, the loss of jobs in Otago – a region that was already slowing will be a great concern to this region. Furthermore, the indication that the “high exchange rate” (we are at about average against the Aussie dollar, where a lot of our exports go – so this is a weakish argument), high interest rates, and lack of domestic demand are starting to impact on manufacturers debt payment schedule is concerning.
As long as businesses can remain in business the upcoming slowdown (so as long as firms aren’t too liquidity constrained) will fundamentally be a period of weak growth. If businesses can’t balance the balance sheet anymore and people exiting industries become prevalent then we are likely to see a sharper deterioration in activity. Government policy to increase the burden on businesses is concerning here – as it appears to be one of the main factors that could turn a cyclical slowdown into something more sinister. Lets just hope commodity prices stay strong.