CHAMPAIGN, Ill. – A warned-of consequence of limiting work visas that went unheeded was an increase in outsourcing of both low-end and high-end jobs to countries with talent and wages not artificially driven up by blocking out new workers. A new study says that the problem is more far reaching than imagined and that firms which outsource aspects of their business to a foreign country also leads to a 'softening' of competition among industry rivals, leading to a hidden cost on consumers, says new research co-written by a University of Illinois business administration professor.
Onerous artificial restrictions on workers has yet another effect, Yunchuan "Frank" Liu contends. Consumers are paying higher prices than they should for goods, even when they are paying less for wages.
"Outsourcing is a topic that affects just about everyone, and the general consensus is that it's bad because American workers will lose jobs because of it," he said. "Most people only focus on the job-displacement angle, but very few people have questioned how it affects consumers and competition in the marketplace."
The study, which will appear in the journal Management Science, is the first to examine the effects of outsourcing on competition as well as consumers and society, said Liu, who co-wrote the study with Rajeev Tyagi, an economist at the University of California at Irvine.
Liu says that if firms are unwilling to pass along the savings they've reaped from outsourcing production and labor to a cheaper country, all consumers suffer because of softer competition.
"If a firm outsources production to a low-cost country, there's a cost-saving effect, but there's also a weakening among on the competition," Liu said.
"If the competition is softened and the production costs become lower, businesses don't have an incentive to pass those savings along to consumers," Liu said. "In some cases, consumers pay higher prices."
Yunchuan "Frank" Liu, professor of business administration at the University of Illinois, says outsourcing tends to soften the competition among industry rivals, resulting in consumers paying artificially higher prices for goods.
(Photo Credit: L. Brian Stauffer)
Before outsourcing became a popular strategy for businesses looking to cut costs, competition among firms was more intense.
"Before firms started outsourcing, firms competed head-to-head, and the result of this competition is that businesses were more consumer-centric," Liu said.
But when firms outsource aspects of their business, they cease competing head-to-head, as the actual competition grows to include more players, Liu said.
"Once more businesses are involved, even if firms become more customer-focused, if their suppliers don't cooperate, they can't lower prices," he said. "So firms lose the incentive to become consumer-centric and competitive. And the reason why that happens is that outsourcing softens the competition among rival firms."
Liu says that businesses aren't simply pocketing the money they're saving from outsourcing; in some cases, the cost saving from outsourcing is not that significant.
Liu says that lawmakers need to consider policies that would facilitate open competition between firms and incentivize satisfying consumers tastes. Otherwise, firms are better off while consumers suffer.
"For public policymakers, it's just another negative effect of outsourcing," he said. "They need to consider not only the Americans who are losing their jobs because of it, but also the consumers who are being gouged."