Outsourcing and the welfare state

A new meme I have been seeing around Twitter is something like “It’s OK to criticize job outsourcing as long as we don’t have a good enough welfare state to protect the losers.”  Maybe no one holds the view in exactly that form but for now treat it as a foil.

Take your attention away from the effect of outsourcing on a single job or single worker and consider it more systemically.  If the critics of outsourcing are correct, and for purposes of argument let’s assume they are, outsourcing lowers real wages for some reasonably large class of U.S. workers.  That’s a permanent negative shock to wages.  Ceteris paribus that may suggest a lower rate of spending on transfers.  For instance if unemployment insurance becomes more generous, the negative incentive effect on workers is stronger when real wages have fallen.

In general we usually argue that higher-wage countries should have more generous transfer programs.

You could argue “the returns to capital are higher, we [they] now can afford this more easily.”  Or you could argue “I believe government training programs will elevate the disadvantaged workers into a higher and better wage class.”  Or maybe you just favor higher subsidies to community colleges.  Try “Even more than EITC already does, we should restructure our welfare state to encourage work.”  There are numerous possibilities.

The key point, however, is that permanently lower real wages have some direct and indeed negative first-order effects on how easy it is to run a well-functioning welfare state.  No one said you had to like that, but let’s not forget about it either.