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

As national economies have integrated through removal of trade barriers, the potential for offshoringproduction was quickly recognized as a strategy to enhance firm performance. At thesame time, labor market reforms opened the door for outsourcing of labor services to specialistfirms that supply labor force teams. The implications of these trends for industries that rely onspecialized workforces have drawn considerable attention. Both manufacturing and food processinghave seen substantial movement toward oursourced labor, yet little research has consideredthe implications of these trends. In both manufacturing and food processing, specificlabor skills are needed that require training and consistency of supply to ensure efficiency in rawmaterial and plant capacity utilization. Hiring from local labor force in the short-run involvessearch, training, and adjustment costs. In the longer-term, a sustainable labor pool must be developedand nutured. Hiring through outsourced labor services firms involves a distinctly differentcost structure and longer-term dynamics play a different role and performance for theemployer as well as the local labor force. Individually, firms face a choice between hiring froma local labor force or outsourcing that task to a specialist firm. Within a labor market, firms competingfor labor from the same pools have joint interests in maintaining a sustainable labor forcewhile they compete to fill their demands. However, as some firms initiate use of outsourcedlabor, the local labor force may be impacted. This issue has not been considered and is takenup by this paper. The paper presents a microeconomic model and uses simulation to evaluatethe 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 pooldecreases 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 oflocal labor employment collapses. We show that even before this threshold is met, the laborforce benefits of the location vanish, reducing the locational rationale for the employer to naturalresource access, output market proximity, and fixed investments in plant and equipment. Themarginal benefits of the location based on these factors may then be outweighed by thoseavailable at other locations and the firm may relocate. We conclude with consideration ofimplications for labor force policy targeted at sustaining particular industries.