A macro-economic analysis of the effect of offshoring and rehiring on the US economy

Offshore labor outsourcing (“offshoring”) is a process in which US companies set up overseas production facilities, employing local workers, simultaneously curtailing their production on US soil and laying off part of their US workforce. This is followed by (is intertwined with) rehiring a part of the laid-off workers, to boost production for domestic consumption and/or export. We present a mathematical analysis of the effects of these processes, on such measures as the personal, corporate, government and foreign balances (income minus expenditures). We use an input-output model of the US economy, derived from government databases, as a reference, and investigate the effects of offshoring and rehiring by mathematical extrapolation. The essence of our findings has been: 1. Primary offshoring results in decreasing (negative) government, personal and foreign balance, and leads to a shifting of private income from payrolls to corporate assets and dividends. 2. Any rehiring is advantageous to the government balance. 3. Rehiring to boost domestic consumption is further decreasing the foreign balance. It also erodes the private balance because part of the incremental income is offset by taxes and lost social income, and because the growth of personal income is outpaced by the growth of personal consumption. 4. Rehiring to boost exports is advantageous to all three balances but just to break even (pay for the foreign cost of offshoring), the export increment has to exceed, by far, the total foreign payroll. 5. A coordinated expansion would be very desirable but requires strong government incentives. More work is needed to incorporate into the investigation the effect of the reduction (or stabilization) of the price of products and, to some extent, services, arising from offshoring. Also, a further extension of this study would involve the analysis of how various taxation and regulatory strategies would affect the offshoring and rehiring process.