As Remote Work Grows, Should American Workers Worry About Offshore Hiring?

When discussing labor offshoring, we inevitably wind up asking ourselves about the effects of the practice on domestic employment. While the answer might appear rather clear-cut – labor offshoring reduces domestic employment – the answer is much more nuanced and heavily grounded in complex economic theory.

A History of Global Labor Arbitrage

Global labor arbitrage refers to the practice of capitalizing on the differences in wages and labor costs between countries by relocating jobs, production, or services to locations where labor is cheaper. In simpler terms, businesses start using offshore workers instead of domestic ones because offshore workers are cheaper. For this article, we’ll simply call the practice labor offshoring.

Labor offshoring is a popular practice because it allows businesses to increase their profit margins by reducing their expenses and potentially even increasing their productivity along the way. The process is almost cyclical – a business can hire workers for less, allowing them to hire more workers, which then results in increased productivity and greater income, which can then be reinvested in the business, which then perpetuates the cycle. In economic terms, it can be referred to as a feedback loop in productivity and reinvestment, and this loop is at the core of why businesses hire offshore workers.

The effects of labor offshoring have been felt across the entire globe and have categorically changed how we as a society function. Goods that were once deemed a luxury have now gone down in price by vast margins thanks to the reduced costs of offshore labor. The prices of everything from clothing, furniture, and appliances have dropped by as much as 50% or more from their historical highs. The decision by businesses like Samsung and Sony to move production to lower-wage countries has caused the price of flat screen TVs to decline from over $2,000 in the early 2000s to under $300 today.

The countless goods and services that are constantly improving our lives today would likely have never existed if it hadn’t been for the power of offshore labor, and the story of offshore labor is far from complete.

The Shifting Landscape of Offshore Labor

While labor offshoring was once relegated to low-cost manufacturing, we have seen a massive shift in the nature of offshore labor in recent years.

The COVID pandemic created changes in nearly every aspect of how our world functions, including labor offshoring. COVID-19 opened up an entirely new realm of the workplace. The advancements in, and growing adoption of, remote work technologies meant that high-skilled workers could perform their jobs from anywhere, including different countries. With this came the possibility of using highly skilled offshore workers to accomplish the same tasks as their domestic counterparts, for less.

The ubiquity and prevalence of remote work technologies mean that offshoring is no longer limited to just manufacturing. White-collar jobs can be readily replaced by offshore employees for less than their domestic counterparts, including jobs such as accounting, computer programming, marketing, and digital design. The ubiquity of these technologies also means that any business, not just massive corporations, can hire offshore workers to replace their domestic employees.

The rise of EOR (Employer of Record) companies should be more than enough evidence as to how effective the practice of offshoring is in the eyes of businesses around the world. By managing workers abroad for clients without them having to set up local entities or handle compliance, EOR businesses make it easier than ever to hire offshore employees for white-collar jobs. The astonishing rise of Deel – reaching $12 billion in valuation in just 5 years – proves that businesses are waking up to the viability of white-collar offshore labor.

Offshore workers can now replace almost any employee at almost any business, and the domestic worker will inevitably face new challenges.

The Lump of Labor Fallacy

So, can any job now move offshore? Does that now mean all domestic employees are going to be replaced by offshore workers? Not necessarily.

The lump of labor fallacy is the false belief that there’s a finite amount of work or jobs in an economy, meaning that any increase in productivity or the number of workers will only redistribute jobs, leaving fewer jobs for others.

So, how does the lump of labor fallacy apply to the debate around offshore labor? It means that the idea that offshore employees will replace domestic ones isn’t necessarily true. It means that even if jobs move offshore, there will still be work for domestic employees. It means that jobs don’t just move around; they get created.

Economic growth creates jobs, and offshore labor creates economic growth the likes of which we have never seen. As we’ve already discussed, global labor arbitrage has resulted in a level of unprecedented economic growth and has shaped every aspect of our society.

So, the changing landscape of offshore labor, the new ability that any and every business has to replace its domestic white-collar workers with cheaper offshore ones, doesn’t necessarily mean that those jobs will be lost. History has shown that the shift to offshore labor spurs economic growth and creates new jobs, jobs that can replace the ones lost to offshore labor.

By moving manufacturing offshore, American electronics businesses have begun investing in and hiring workers specializing in research and development, product design, engineering, software development, and quality control. The increase in production has spurred increases in profits, allowing businesses to invest and create newer and better domestic jobs than what once would have existed had they retained onshore manufacturing. 

History is littered with examples of offshoring creating countless high-quality, high-paying, top-tier jobs in the United States. This extends into countless fields, including electronics, avionics, research and development, and niche/high-tech manufacturing. History has shown that offshoring doesn’t simply take jobs, it creates newer and better ones.

The Flaw in the Fallacy of the Labor Lump

So, even if jobs move offshore, new ones will be created? Right?

Economic growth does mean job growth, and offshore labor has historically generated immense economic growth, and even job growth here in the US, but again, the reality is often more complicated.

New jobs require new skills, skills that not every white-collar employee who’s about to be replaced can adapt to. White-collar jobs often require a long and expensive education, and getting a new education is far from easy. Furthermore, the best white-collar jobs, the high-paying white-collar jobs, require a significant level of experience, experience that can’t be built up overnight.

Just like how new skills can’t be learned overnight, new jobs can’t be created overnight. Figuring out what new employees are required to maximize profits isn’t a simple thing. Businesses have to find a need, and that takes time. While there may be room for new jobs and domestic employees to fill them, what they are may be anybody’s guess, including the businesses. Maybe there might be a need in an obscure area of marketing that can’t be filled by an offshore employee, or something in RND, but figuring it out will take time.

Offshoring can also create a bit of an arms race. Every step forward a domestic worker takes to find a new job is going to be followed by an offshore worker, who is going to work just as hard to learn just as much and gain just as much experience as a domestic worker. This means that even the best new jobs that are created aren’t necessarily going to be around for long, and domestic workers are going to have to work even harder to remain ahead.

For the workers who are just hanging on while the job market is shifting, even if they can keep the same job they’ve had for years, they’re going to be forced to compete with an offshore employee who can do the same job for less. Domestic workers won’t be able to compete with offshore workers unless they accept lower wages. Build this up to the scale of an entire nation’s economy, and what you get is wage stagnation, something that doesn’t bode well for anyone trying to make a living.

To top it off, the root of offshoring is increasing profits, not boosting economic growth. Offshoring helps businesses reduce expenses and increase profits, but those profits aren’t necessarily going to be reinvested back into the economy, or even into the business. Profits might go into the bank, to shareholders, or to executives. If firms don’t take the time to reinvest their earnings back into the business, which they may very well choose not to, then their business might not grow in a way that the economy will benefit from, and new jobs won’t be created.

The reality is that the lump of labor fallacy might not hold up in the real world. Labor offshoring could cause problems for domestic workers. They may have a tough time staying ahead, wages might stagnate, and economic growth isn’t always guaranteed.