In Defense of Outsourcing

Since it was released Dec. 19, the Katz report has brought much attention to Harvard’s practice of outsourcing. Presumably, Harvard uses outsourcing as a way to avoid paying above-market wages and benefits to its employees. There is no denying that the argument against this practice has a certain appeal. That is, if one accepts the premise that exceptionally wealthy institutions like Harvard ought to share some of that wealth with their workers, it follows that institutions like Harvard should not use outsourcing as a way to circumvent that obligation. There are plenty of good arguments both for and against this ethical premise, and I have nothing to add to those arguments. However, I fear that, from the seeds of the anti-outsourcing rhetoric that has become so pervasive within Harvard, a potentially dangerous fallacy has been harvested.

It is one thing to suggest that Harvard, due to its exceptional circumstances and almost unbelievable wealth, should not outsource its employees. It is quite another thing altogether to believe that outsourcing is, in general, a “deplorable” practice, as it has been called. After all, why shouldn’t firms outsource? Why shouldn’t the worker who is willing to render the best services for the least pay be the one who gets the job? Instinctively, most of us recoil in disgust at the suggestion that wages should reflect nothing more than the cold calculus of supply and demand. Yet, few of us realize just how essential this “cold calculus” is for the welfare of laborers themselves.

In a free market, wages reflect the scarcity of those services that different workers can perform. In other words, suppose Bill is a good computer programmer but an excellent web designer. Which job should Bill take? At first, the answer seems obvious. Bill should design web pages. However, what if good computer programmers are hard to come by and web designers are a dime a dozen? In this case, the ruthless forces of supply and demand ensure that the wages of computer programmers are higher than the wages of web designers. As a result, Bill gets the “signal” that he should take a job as a computer programmer rather than a web designer. To do otherwise would be a waste of Bill’s highly valuable talents.

Or consider the example of a company deciding which of two applicants, Smith or Jones, to hire as a package deliveryman. Smith is slightly more qualified; but Smith is also qualified to take a more productive job as, say, an airline mechanic. Smith should really become an airline mechanic and leave the package delivery job for Jones, who has a more limited skill set. However, only the free market can ensure that the more urgent need for airline mechanics is reflected in a higher wage.

Both of these examples illustrate how, thanks to the price system, prospective employers and employees can unknowingly take into account information about scarcities and preferences they could not possibly know any other way. Without honest market determination of wages, this information would simply be lost. Workers would unwittingly accept jobs they were overqualified to hold and companies would unwittingly hire individuals who, under a free market, would know their services are more highly valued elsewhere. The poor, of course, would be the greatest losers of all. Without the right to accept lower wages, they would be deprived of their only competitive advantage over more highly skilled workers.

Though it sounds nice to say that each laborer’s compensation should reflect his needs, the implementation of this view would entail losing all of the benefits of the division of labor. Instead of flowing to those jobs that will produce the most valuable goods for consumers, labor would be allocated according to the politicized vagaries of some kind of official bargaining process. Who would gain under this framework? If the experience of Cuba, North Korea, Soviet Russia and Communist China is any guide, no one.

The fallacy of the outsourcing-is-wrong crowd is essentially a fallacy of composition. Well-intentioned activists look at a particular business and, correctly, see that its employees would be better off if the company were forced to pay a wage that reflects some benchmark living standard rather than the principles of supply and demand. The resulting misdirection of labor and underemployment, however, means that overall real wages tend to fall, not rise. What labor activists see as a victory for labor is typically a victory for relatively overpaid, underemployed union protected workers over unskilled, unprotected workers and consumers. Nor is the solution of protecting all workers from market forces a viable option, because this implies abandoning the very market-determined division of labor that accounts for the “first world” nature of our society.

While there are specific, ethical arguments that can be used against the practice of outsourcing at an extremely rich institution like Harvard, these arguments cannot be extended to labor as a whole. Ignorance of this truth explains why so many campus activists have become the willing dupes of the narrow, antisocial interests of union labor.

Steven R. Piraino ’02 is an economics concentrator in Leverett House.