The Real Outsourcing Problem

An article in the New York Times the other day highlights an issue I have written about before, that of the changing nature of firms as a source of continued low wages and increasing inequality between workers.

In the eyes of the current administration, a major problem for American workers has been outsourcing. What this article points out is that most outsourced jobs actually remain here in the US; they are instead of leaving to low wage countries, they are subcontracted out to specialized low wage firms within the country.


As research has shown, the increase in inequality in the US is being driven mostly by interfirm inequality, not intrafirm. The latter would be appear as, within any given company, the CEOs at the top getting big raises and the entry level workers getting pay cuts. And while this is the case at the biggest firms, like large retail companies, it isn’t so for the rest of the economy. For most firms, pay structures have actually become more equal.

This change is largely a result of firms reorganizing their structure. It used to be that an organization, say a newspaper, would employ everyone who worked in their building. Yes, of course the journalists and editors and managers; but also the janitors, the electricians, the tech support, etc. This is rarely the case any longer. Instead, firms are increasingly organized around their core mission, and secondary and support tasks are spun off and subcontracted out. So now the janitor works for a separate company, as do the electricians and computer people. Even secretaries and HR are increasingly subcontracted out.

How does this drive inequality? When that janitor worked for the newspaper, he shared in the firm’s successes, and  probably out of a human sense of fairness it’s difficult to have huge differences in pay  between people who are working together daily. But when those roles are contracted out to outside firms, that is no longer the case. The janitorial subcontractor can pay far less, and isn’t subject to the workplace regulations of the newspaper firm. This isn’t trivial: the article cites research showing significant pay cuts for many roles (up to a 24% reduction for security guards, for example). Additionally, these subcontracted jobs are often temporary and lack health insurance or other benefits.

The article points to the shocking statistic that over the last decade, 94% of the jobs added to the economy were in this temporary/contracted sector. While this trend may be more ‘efficient’, in the strictly economic sense, an economy does not make a society. Many conservatives talk about the dignity of work as a positive good for people, and I’m inclined to agree. But as our economy shifts to this model, it would seem to be very hard to find dignity and purpose in a growing low wage, dead end, high uncertainty sector of the economy. Sure, if you were a janitor at the New York Times, it wasn’t particularly glamorous. But you were connected in some way to the mission of that organization. Nowadays, you’re just a janitor; probably working on demand, hours not guaranteed, maybe in a different building every week. Your work is now cleaning, nothing more.

Of course, there is no easy solution to this problem. Banning such subcontracting would be lunacy, and other types of mandates would be too heavy handed. But if the administration wants to be serious about American jobs, this is an area that demands focus, not trivial sectors of the economy like coal mining or immigrant labor.


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