Sunday, January 16, 2011

Is job outsourcing already a piled trade?

Is job outsourcing already a non-sustainable piled trade?

Job outsourcing has been a great source of increased competitiveness and cost effectiveness for a lot of companies. Jobs seen as prime candidates for outsourcing were those that could be done with minimal face to face contact with customers and other colleagues, and resulted in perceived minimal intrusion to regular company workflows and processes if they were moved offsite. Outsourcing staff jobs to offshore locations that promise decreased labour costs has led to increased profits, very important especially in the aftermath of the recent economic downturn.

But as early outsourcers saw increased cost competitiveness, other companies have also joined in to keep from falling behind in terms of competitiveness. This could be the commercial version of what is known in hedge fund circles as a piled trade, a trade that is profitable only if one fund does it, but when everybody else does it, the trade loses its profitability, and eventually becomes a dangerous one, as getting out of it becomes impossible without breaking down the house of cards that is now the trade. If everyone is already in the trade, then everybody is a seller, and there are no longer any buyers.

The recent downturn might have been a good opportunity for companies to offshore more jobs, as the recent economic downturn led to decreased sustainability of existing labour cost structures. This economic phenomenon, good for the health of particular companies, falls into a fallacy of composition when looked at in terms of the general economy. When a company outsources jobs, previous employees will have to find similar work in other companies. In the absence of work in competitors, they will have to look in other industries. What happens when entire industries outsource jobs as an intricate part of overall cost strategy?

People who are unable to find jobs stop becoming consumers, and as such, this has knock on effects in many industries who need their continued consumption to generate continuing sales. As more consumers drop off the consumer ranks, this puts the viability of more businesses in jeopardy, as this results in a general fall in aggregate demand.

The remaining consumers left with jobs will have to take on the slack in demand left by colleagues no longer wiling or able to buy. The next logical step would be for companies to start tapping the newly emerging foreign economies now realizing an upturn in jobs generation and consequently surging demand. Failing to do so, many companies will find themselves the losers in a game of musical chairs where the last one unable to find substitute consumers falls off the ranks of solvent companies. This could then lead to the next round of demand destruction and the next loser in the musical chairs game.
To simplify this scenario, in an economy where everybody is an outsourcer, then everybody is by necessity a seller, and there are no longer any buyers left to buy the goods.

Will the emerging economies’ surging demand be enough to compensate for the decreased demand from locals who have lost jobs? Will companies who have hollowed out their staff ranks find their markets in the new markets they are creating via offshoring?

My guess is not everyone will find viable demand abroad. And especially if the new jobs created do not pay as well as the old ones they have made redundant (that is why they outsourced, to find cheaper labour), many higher cost goods and services will likely fall off the market as unaffordable luxuries, even in emerging economies. If people who make iPads cannot afford to buy iPads, then there will be no market for iPads. If people who make Fords can no longer afford to buy Fords, then there is no market for Fords.

So, is job outsourcing already a non-sustainable piled trade?


The Arthurian said...

Hi, Rogue. You write:
To simplify this scenario, in an economy where everybody is an outsourcer, then everybody is by necessity a seller, and there are no longer any buyers left to buy the goods.

Sounds like supply-side nirvana.

Could you give a simple example of "piled trade" ? Google showed me nothing on it, except a few links to your post...

Rogue Economist said...

Try googling the more common term 'crowded trade'. An example would be US housing starting late 2008. Everyone was a seller, no one was a buyer.