How would offshoring production affect the composition of goods produced, and the relative wages between high-skilled...

How would offshoring production affect the composition of goods produced, and the relative wages between high-skilled and low skilled labor in home and foreign countries. What are the causes of wage polarization in the US and what kind of jobs are the most and the least vulnerable to outsourcing/offshoring?

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Expert Solution

The average producer would definitely aim for higher profit margin at the same time keeping a keen eye for lower costs so that the area of safety margin is maximised. In pursuit for lower costs, the producer would scout for those markets where the inputs are available for low prices. This has led to the rapid popularity of deployment of production processes beyond domestic borders to where ever the inputs are available at cheaper prices and better quality.

The composition of goods has become consumer oriented or market oriented. The consumers have access to a wide variety of goods produced at competitive prices. A wide variety of consumer and capital goods are available, competing with each other on the basis of quality and market reach.

The system of outsourcing has led to a significant change in the relative wages of high skilled and low skilled labour. The elasticity of demand for low skilled jobs being ‘greater than 1’, or ‘elastic’, the firms are finding it more profitable to employ low skilled foreign workers for low wages. This has significantly affected the high and low skilled jobs in the US markets, although the elasticity of demand for high skilled labour being inelastic, it may not be possible for firms to find better replacements in the other countries.

Wage polarisation or income inequalities have lead to a large divergence in wages.

Expansion of viable global business opportunities and coordinating with foreign labour markets such that more of foreign workers are employed as compared to domestic US workers, lower costs of such employment , imbalances in productivity levels, ill effects of excessiveness of ‘open economy’ principle, wage inequalities among sectors are various causes for wage polarisation.

The low skilled jobs are especially at risk since these have been outsourced for lower wage rates. This has led to large scale unemployment and a significant effect on the aggregate spending by consumers. However it has to be noted that many of the workers who have lost jobs because of business outsourcing may be able to find alternate means of employment in other sectors since US being a market dominated economy, the free market forces of demand and supply will allow for freer movement of resources , especially labour from one industry to another. This reduces any ‘greater’ risks of market failure especially in the employment sector.

Rahul Sunny answered 1 year ago

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