The safety shoe brands make their decision on how to produce comparatively less costly, and they make a decision of moving their production to the other countries.
The main reason for this decision is the relatively cheaper labor costs in some developing countries like China. Subsequently, the safety shoe companies are transformed into trading businesses in their countries. Outsourcing the production of the shoes will influence the following agents in the economy: 1-Workers who were working in the shoe production factory in the countries of origin, 2-The other workers, 3-The demanders of the safety shoes, 4-The safety shoes companies' shareholders, and 5-All the agents in the countries of origin's economy.
When the company starts outsourcing the production to the Asian countries, the workers of the shoe factories will be unemployed, and they need to find other jobs for themselves. If the labor force is mobile enough geographically and by their features, they can find other jobs easily; however, if they are not, then they might stay unemployed for a relatively longer term (Pearlstein 2016).
The outsourcing might push a structural change in the labor market. The unemployed people will be transformed into the workers working in the other industries. The structural change in the labor market might increase the labor cost in the short term because the transformed workers will need to develop an adaptation in the near term. In the long run, the labor productivity might increase.
Graph 1: Change in the Consumer Surplus
The demanders for the safety shoes will be able to buy the shoes at relatively lower prices. The reason behind the lower prices is the cheap production cost due to the cheap labor cost. Therefore, the consumers can save some money for the other things because they will pay less for the shoes. The consumer surplus will increase. The graph 1 indicates that the decreasing production cost will increase the supply, and the supply curve will shift to the right. At the beginning, the consumer surplus is the field A, and after the outsourcing, the consumer surplus is the sum of areas of A, B, and C.
The safety shoes companies’ shareholder might receive more profit. The decrease in the cost will give a huge advantage to the enterprises in the market because they can reduce their market price, and increase their competitiveness against their rivals. The competitiveness will increase the sales and the market share.
The rest of the economy will be influenced from the outsourcing. The outsourcing will decrease the available number of jobs in the country. Also, some capital will move to the country where the production is outsourced for building and sustaining the production. Therefore, the home economy will lose some income. On the other side, the cheaper products will decrease the inflation in the countries of origin (Ben 2013). Outsourcing will create an international specialization, and each country will produce the products which have the lowest level of production cost in the country, and other goods will be imported from the other countries which produce some goods with the low level of production cost. The international specialization might decrease the inflation.
The price elasticity of the safety shoes is high because it is not a very important product for the people. Therefore, the gains in productivity cannot be converted into higher profits because the high price elasticity of demand means that the customers will decrease their demand when the price goes up. Consequently, the traders of the safety shoes cannot increase the price to increase their profit in the home country.
Outsourcing will increase the real incomes of the customers in the home country because the inflation rate will decrease. On the other side, the outsourcing will cause a loss of income because the production is outsourced and some resources go abroad. Therefore, we might expect a decrese or an increase depending on the difference between the gain of real income thanks to the decreasing inflation and the decrease in income due to outsourcing. The safety shoes are close being to luxury goods. The luxury goods’ demand increases when the income increases. If the income increases as the result of outsourcing, the demand for the safety shoes increases, and vice versa.
Defining the losses from outsourcing the production will also point us the possible solutions. Outsourcing might cause two primary losses: 1-Loss of available jobs, and 2-Loss of income. As the solution to these primary losses, the economy management might develop a program to increase the mobility of the labor so that they can find employment in the other industries (Stephson and Hufbauer 2016). Secondly, the financial resources used for the shoe production might be allocated to some other industries where the funds could be used relatively more efficiently. This strategy might generate income and compensate the revenue loss stemmed from the outsourcing.
Works Cited
Jr., Ben. "Why We Can All Stop Worrying About Offshoring And Outsourcing". The Atlantic. N.p., 2013. Web. 23 June 2016.
Pearlstein, Steven. "Outsourcing: What’S The True Impact? Counting Jobs Is Only Part Of The Answer.". Washington Post. N.p., 2016. Web. 23 June 2016.
Stephson, Sherry and Gary Hufbauer. "Labor Mobility". World Bank. N.p., 2016. Web. 23 June 2016.
