“The End of Employees”

The Wall Street Journal has an important new story, The End of Employees, on how the big company love of outsourcing means that traditional employment has declined and is expected to fall further.

Some key sections of the article:

Never before have American companies tried so hard to employ so few people. The outsourcing wave that moved apparel-making jobs to China and call-center operations to India is now just as likely to happen inside companies across the U.S. and in almost every industry.

The men and women who unload shipping containers at Wal-Mart Stores Inc. warehouses are provided by trucking company Schneider National Inc.’s logistics operation, which in turn subcontracts with temporary-staffing agencies. Pfizer Inc. used contractors to perform the majority of its clinical drug trials last year….

The shift is radically altering what it means to be a company and a worker. More flexibility for companies to shrink the size of their employee base, pay and benefits means less job security for workers. Rising from the mailroom to a corner office is harder now that outsourced jobs are no longer part of the workforce from which star performers are promoted…

For workers, the changes often lead to lower pay and make it surprisingly hard to answer the simple question “Where do you work?” Some economists say the parallel workforce created by the rise of contracting is helping to fuel income inequality between people who do the same jobs.

No one knows how many Americans work as contractors, because they don’t fit neatly into the job categories tracked by government agencies. Rough estimates by economists range from 3% to 14% of the nation’s workforce, or as many as 20 million people.

As you can see, the story projects this as an unstoppable trend. The article is mainly full of success stories, which naturally is what companies would want to talk about. The alleged benefits are two-fold: that specialist contractors can do a better job of managing non-core activities because they are specialists and have higher skills and that using outside help keeps companies lean and allows them to be more “agile”.

The idea that companies who use contractors are more flexible is largely a myth. The difficulty of entering into outsourcing relationships gives you an idea of how complex they are. While some services, like cleaning, are likely to be fairly simple to hand off, the larger ones are not. For instance, for IT outsourcing, a major corporation will need to hire a specialist consultant to help define the requirements for the request for proposal and write the document that will be the basis for bidding and negotiation. That takes about six months. The process of getting initial responses, vetting the possible providers in depth, getting to a short list of 2-3 finalists, negotiating finer points with them to see who has the best all-in offer, and then negotiating the final agreement typically takes a year. Oh, and the lawyers often fight with the consultant as to what counts in the deal.

On the one hand, the old saw of “a contract is only as good at the person who signed it” still holds true. But if a vendor doesn’t perform up to the standards required, or the company’s requirements change in some way not contemplated in the agreement, it is vasty more difficult to address than if you were handling it internally. And given how complicated contracting is, it’s not as if you can fire them.

So as we’ve stressed again and again, these arrangements increase risks and rigidity. And companies can mis-identify what is core or not recognize that there are key lower-level skills they’ve mis-identified. For instance, Pratt & Whitney decided to contract out coordination of deliveries to UPS. Here is the critical part:

For years, suppliers delivered parts directly to Pratt’s two factories, where materials handlers unpacked the parts and distributed them to production teams. Earl Exum, vice president of global materials and logistics, says Pratt had “a couple hundred” logistics specialists. Some handlers were 20- or 30-year veterans who could “look at a part and know exactly what it is,” he adds….

Most of the UPS employees had no experience in the field, and assembly kits arrived at factories with damaged or missing parts. Pratt and UPS bosses struggled to get the companies’ computers in sync, including warehouse-management software outsourced by UPS to another firm, according to Pratt..

The result was $500 million in lost sales in a quarter. Pratt & Whitney tried putting a positive spin on the tale, that all the bugs were worked out by the next quarter. But how long will it take Pratt & Whitney to recover all the deal costs plus the lost profits?

There’s even more risk when the company using contractor doesn’t have much leverage over them. As a Wall Street Journal reader, Scott Riney, said in comments:

Well managed companies make decisions based on sound data and analysis. Badly managed companies follow the trends because they’re the trends. A caveat regarding outsourcing is that, as always, you get what you pay for. Also, the vendor relationship needs to be competently managed. There was the time a certain, now bankrupt technology company outsourced production of PBX components to a manufacturer who produced components with duplicate MAC addresses. The contract manufacturer’s expertise obviously didn’t extend to knowing jack about hardware addressing, and the management of the vendor relationship was incompetent. And what do you do, in a situation like that, if your firm isn’t big enough that your phone calls get the vendor’s undivided attention? Or if you’re on different continents, and nothing can get done quickly?

We’ve discussed other outsourcing bombs in past posts, such as when British Airways lost “tens of millions of dollars” when its contractor, Gate Gourmet, fired employees. Baggage handlers and ground crew struck in sympathy, shutting down Heathrow for 24 hours. Like many outsourced operations, Gate Gourmet had once been part of British Airways. And passengers blamed the airline, not the wprkers.

Now admittedly, there are low-risk, low complexity activities that are being outsourced more, such as medical transcription, where 25% of all medical transcriptionists now work for agencies, up by 1/3 since 2009. The article attributes the change to more hospitals and large practices sending the work outside. But even at its 2009 level, the use of agencies was well established. And you can see that it is the sort of service that smaller doctor’s offices would already be hiring on a temp basis, whether through an agency or not, because they would not have enough activity to support having a full-time employee. The story also describes how SAP has all its receptionists as contractors, apparently because someone looked at receptionist pay and concluded some managers were paying too much. So low level clerical jobs are more and more subject to this fad. But managing your own receptionists is hardly going to make a company less flexible.

Contracting, like other gig economy jobs, increase insecurity and lower growth. I hate to belabor the obvious, but people who don’t have a steady paycheck are less likely to make major financial commitments, like getting married and setting up a new household, having kids, or even buying consumer durables. However, one industry likely makes out handsomely: Big Pharma, which no doubt winds up selling more brain-chemistry-altering products for the resulting situationally-induced anxiety and/or depression. The short-sightedness of this development on a societal level is breath-taking, yet overwhelmingly pundits celebrate it and political leaders stay mum.

With this sort of rot in our collective foundation, the rise of Trump and other “populist” candidates should not come as a surprise.

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  1. Praedor

    Again, my answer to this is to de-incentivise rods practice AND reign in CEO pay by tong CEO pay, correlate tax rate, and employment practise together. Corporate taxes are minimized when CEO compensation is no more than 70x mean worker pay in that company INCLUDING ALL WORKERS whether Temps or outsourced. Their compensation, in real dollars, is what determines 70x worker pay. This would make it harmful to CEO pay to offshore or go on Temps because you wouldn’t be able to claim that $10/day in poor country X is”equivalent” to $40/hour in the US. No, $10/day is $10/day. Period. Also, any benefits you thought you’d get by using Tempos or a employment agency vanish because they count in determining Ave pay too, and this impact CEO pay.

    1. Praedor

      For some reason this post didnt show up on my tablet after posting so I couldn’t edit out the obvious typos – it didn’t even appear to have gone in at all. Sorry about that.

      1. Kris Alman

        I would add this. It was deplorable for Trump to have fired Acting AG Sally Yates after she ordered Justice Department lawyers to stop defending Mr. Trump’s executive order banning new arrivals to the U.S. from seven Muslim-majority countries.

        But Sally Yates was a hero for another reason. Yates was cracking down on systemic abuses by holding top healthcare executives personally accountable for false Medicare and Medicaid claims and illegal physician relationships.

        Now it’s personal: Top execs made to pay for companies’ false claims

        1. Hans Gruber

          To Kris Alman,
          You are so correct. It was deplorable for the President of the United States to have fired “Acting” Sally Yates after she publicly acted as though she had greater authority than the President of the United States. Especially concerning her heartfelt concern about the temporary banning of new arrivals from those countries that have have the highest concentrations of criminal psychotic murderers. It’s Islamophobic requiring the vetting part of the immigration process now be improved to the point where only deserving, hard working, ethical, moral, good people that are a benefit to all of us will then be allowed in from those countries. Especially racist and fascist is President Thump’s proposal to work with the Russians instead of against them so the terrorists are eliminated so that good, hard working, beneficial, moral, ethical people can stay in their homes and communities in their own countries; creating a good future for their families and loved ones there; instead of being persecuted & forced out by criminal psychopath murderers, slavers, and rapists. Poor Sally Yates!

    2. Hans Gruber

      Praedor, Your post was one of the most brilliant I’ve read. Simple, elegant, and realistic. PLEASE keep posting!
      I would like to add; that I am a small business owner and my services allow me to listen to many people of varied backgrounds and viewpoints. Almost across the board, people reveal how their CEO’s, top executives, and government impose needless new systems, dubious of value software replacements, and workplace changes (or lack of changes) that disrupt production, reduce work quality, and make a successful business less so. The almost universal viewpoint I hear, is that the only reason the places of these people’s employment continue to produce acceptable products and/or services is that the middle management and supervisors have to work their butts off. The selection process for uppermost leadership positions at these companies has gone insane, in part due to choices of candidates mandated by having this degree, that certification, or some government diversity requirement. Of course some education is necessary in some cases, and diversity will work well if the candidate is worthy of the position. Many will argue with my points, but arguing that business leadership doesn’t do some pretty neurotic things, is itself neurotic.

  2. BeliTsari

    I remember hoping: Well, maybe Obama will actually get some decent folks into the Judiciary… bring kids home from Iraq, maybe try for Medicare over 55 (to the advantage of the insurance & Pharma sectors?) But the one thing I’d actually expected him to accomplish was enact https://www.congress.gov/bill/110th-congress/senate-bill/2044 which would get the Kleptocrats a few more years out of the moldering corpse of American Labor (and not hurt multinationals, who’d off-shored, outsourced or speciously re-classified their largely undocumented, 3rd party, contingency/ gig employees decades previously). Wage-theft Democrats was a new concept to some of us more easily deluded working class Yankees, reeling from Bush. I think a strong fantasy life’s essential nowadays.

      1. BeliTsari

        I imagine that this is among the pesky downsides of living in our YOOJ autocratic neo-Confederate theocratic kleptocracy; wage theft has always been right at the top of both parties’ platforms? If they can’t hide it, who will they blame it on?

    1. Deanna Johnston Clark

      Yes…as a boomer grandmom, I remember many such elections since my first vote in 1968 when the issue was Vietnam.
      Whoever actually runs planet earth, it ain’t the voter or the voted for.
      When they take that oath, the boom falls. “Listen up, dummy, here’s how it works, and here’s what you’re gonna do, got it?”

  3. GlassHammer

    -“people who don’t have a steady paycheck are less likely to make major financial commitments, like getting married and setting up a new household, having kids”
    -“more brain-chemistry-altering products for the resulting situationally-induced anxiety and/or depression.”

    Decline in family formation and a populace seeking to anesthetize itself are indications of a civilization in decline. Our problem is much bigger than employment.

    1. Disturbed Voter

      You can employ deplorables, you can enslave deplorables, you can kill deplorables. The only way that a “return maximizing” system won’t choose killing, is if the unit cost of killing is higher than enslavement or employment. I can hope that the bureaucratic effect of increasing costs will work faster on the cost of killing or enslavement. Reducing the cost of employment (regulations) wouldn’t hurt.

      1. BeliTsari

        We’d guessed this was why Dickens, Niccolò Machiavelli, Frederick Douglass, E. A. Blair & Marx were being burnt by the DeVos Christians. Why teach management for FREE, when the drooling Know Nothings will PAY to send their dead-eyed vipers to seminars or A Beka online curricula?

      2. redleg

        It does hurt workers, contract or not.

        Eliminate environmental protections and the entire industry that investigates, researches, enforces, litigates, and mitigates environmental impacts are likewise eliminated. These are generally highly skilled professions, and has wide ranging impacts from workers all the way to the global ecosystem. Then there are economic ripple effects on top of that.

        If we are going to eliminate an entire career tree, health insurance is a better choice.

        1. jrs

          Not sure what this has to do with the article, but yes people will LOSE jobs to Trump, skilled and socially beneficial jobs like at the EPA.

          For heaven knows what, jobs building useless walls to nowhere I guess, which somehow in Trumps warped mind is a more productive line of work (it won’t even work to curtail immigration).

        2. BeliTsari

          Thank you for your astute, pertinent & seldom mentioned comment (which to those of us in QA, is something we’ve believed central to the issue, not a tangent or unexpected side benefit of our sharecropper corporatocracy). We’d noticed contract buy-outs & forced early-retirement in the steel industry, in the 90’s, our clients’ engineers (scruffy & cantankerous, who’d stand by us if we were right & replace us if we got out of hand) were all replaced by clueless, gullible desk jockeys, devoid of empirically honed judgement… eventually, we’d have 2-3 gnarled old timers, amidst crews of neophytes (first they tried very well trained & knowledgeable foreign nationals, then pensioners, let go from the vendors) finally, they tried to 1099 the desperate ones, on the run from skip-chasers, deputies & repo-men. They’d try sending us half way across the country, mention nothing, then see what we’d do (once we figured out we’d earned no overtime?) We’d be in Indian or Russian owned mills where 80% of the employees were totally undocumented foreign nationals, many of the balance wildly underpaid temps. And the good-old-boy management resembled characters outa Harriet Beecher Stowe. Lots of our counterparts were straight back from Afghanistan & Iraq, verifying that most of their gig- economy contingency employment had all been the same, regardless of industry sector: off-shored aircraft, as well as bridge, structural, water, nuclear, inspectors… what regulation?

      3. different clue

        Then again, reducing the level of artificially engineered competition with economic-aggression production-for-export platforms with underpriced costs wouldn’t hurt.

        Free Trade is the New Slavery. Protectionism is the New Abolition.

    2. Dave

      Leveraging guilt to rationalize the Invitation of the least educated into your nation from the most barbaric failed states and cultures in the world is another sign of civic decay.

      1. MP

        …or those with potential who are “educated” and are “victims” of false advertising campaigns…I mean propaganda…

        1. Dave

          Yup, many of the Taxi and Uber drivers around here arrived and took out private loans to get “educated” and now are deep in debt and are too ashamed to go home.

          1. MP

            Start focusing on the predators at the top of the pyramid scheme and then watch how those same culprits and their networks “come to the rescue” in order to capitalize on the “pain and suffering” they help to create. I see a pattern, don’t you?

            Barbarians are at the gates…but you may be looking in the wrong place. Beware…all types of people are “vulnerable” and they will more easily identify with other human beings living under a variety diminished circumstances. Victim shaming won’t be a viable option in the not so distant future.

      2. JEHR

        Dave, I hope you are not including Syria in your “failed states and cultures” description. Syrians are very well educated and will add much to any nation’s economy. It is not a sign of “civic decay” in the Syrian culture, but a sign of civic decay in a nation that will not accept people from a war zone. An invitation should not be dependent on one’s education but on one’s need and desire to survive a war zone..

        1. wilroncanada

          Iraqis were also comparatively educated, right up through university, under its autocratic leader. Libyans were, by and large, well educated, or at least getting so, under its autocratic leader. The most poorly educated, probably, are those countries which have been under US or European hegemony for generations: a lot of Central and south America, a lot of Africa, etc. Not to mention the US itself, which has been colonizing its own hinterland for many decades. The same applies to countries like Canada, Australia, etc. particularly in terms of their indigenous populations.

        2. Felix_47

          How about the worst drought in 900 years, and an exploding population? That had nothing to do with the problem?

    3. Peter

      Don’t forget student debt. Not only are many recent graduates underemployed or unemployed, they’re in the hole tens of thousands. Further incentive not to make any sort of financial commitment. Student debt should be cancelled to promote earlier family formation.

  4. thoughtful person

    This trend matches up with the trends of dropping life expectancy, especially among the lower half of income earners, and with slowing economies globally.

    It’s almost a negative feedback loop.

    Politcal implications: the rise of far right politics; if you are a monarchist, or want to create an aristocracy, these trends are probably in your interest.

    1. Praedor

      Sure, it is partly psychological but it also has direct connection (by DESIGN) to the fact that such people don’t have healthcare, even with Obamacare insurance. The idiots that sing the praises of Obamacare and how millions now have insurance seem to think that means those people have HEALTHCARE to go with it.

      Insurance is theft. Insurance is not even remotely “healthcare”. Much of those newly insured have their insurance, thanks to a government subsidy, but STILL lack healthcare because their premiums and deductibles are too high to allow them to see doctors. Thus, they’re dying or going to die sooner due to untreated maladies, but at least they paid insurance company CEOs their bonuses with their subsidized insurance payments!

      1. Bugs Bunny

        Mutual insurance however is (was) socialist by nature. The true mutuals were crushed out of existence by share for share conversions to private companies that ripped off policy holders and gave a big payday to the C suites and the lawyers. Thanks to inept state insurance commissioners and assemblies for that one.

      2. d

        while having health insurance doesnt mean you have health care, not having it does mean not having health care at all, short of having a life or death condition, as hospitals (for now an way) are only required to stabilize you. they arent required to cure you.

        but then the high deductible insurance is one of those scams that some politicians gave us because they could suggest that the patient (customer) could just shop around for better deals. course that depends on us patients knowing what medical treatment is best for us, and which is the cheapest of those., the former pretty much requires patients to be as knowledgeable as doctors. the latter means we have to know what the treatments cost. could luck with that

  5. David

    I would force policy-makers in every advanced western nation to read and reflect on the last paragraph, because it describes a mindset and a series of practices that are now found everywhere in western economies.
    As David Harvey reminds us in his book on the Contradictions of Capitalism, Marx identified long ago that there was a contradiction between holding down employees wages, and still expecting them to have the purchasing power to buy the goods their cheap labour was making. This problem has become more acute with time, simply because we buy a lot more “stuff” than they did in the 19th century, and we take a lot longer to pay for it, often on credit. Houses, cars, household goods, even computers, are now significant expenditure decisions, repaid at least over months, if not years and even decades. The social corollary of mass home ownership, after all, is some assurance that you will be employed over the life of the mortgage. Otherwise, not only won’t you buy the house, you won’t improve or extend it, or even maintain it, so a whole series of other purchases won’t get made, and the construction and maintenance industries will have less work. Instead, you’ll save money, so removing purchasing power from the economy.
    I assume there are people in large private sector companies clever enough to under stand this, but as always they are focused on how much money they can extract from the system in the next few years. After that, if the system crashes, well, who cares, They’re all right.

    1. susan the other

      old tricks. John D. Rockefeller became a zillion times richer after he was forced to divest himself of his majority interest in his various companies. And back then it was a simple case of anti-trust. There were no benefits to reclaim as profit or revenue or whatever. This won’t work in today’s world because there really isn’t anything left to exploit – but half-baked ideas die hard sometimes.

    2. Altandmain

      There’s a quote on this one:


      Henry Ford II: Walter, how are you going to get those robots to pay your union dues?

      Walter Reuther: Henry, how are you going to get them to buy your cars?

      The Economist Article this one refers to is pretty awful, and totally ignores the wage-productivity gap.

      Here’s an interesting article on that:

    3. ThePanopticoin

      Very true. Capitalism only works as long as enough people (or states) are able to take up ever-larger debt, to close the gap (called “profit”) between expensive goods and comparatively cheap labour. Watching developments in recent years, this very source of profit and thus base of the economic system is, even on a global level, quite limited …

    4. David Barrera

      Sure. Marx Capital 1 on the crisis of production. Marx capital 2 on the crisis of realization…but this constitutes just one undesirable aspect-this one indeed very macro- among the many others which the expansion of the “contracting-subcontracting chain” has brought and will bring about. The Wall Street Journal article is-as it is to expect- late, blind to the core problems of workers and incapable to see and understand the true practical raison ( & reasons) d’être of outsourcing. I guess Yves Smith purpose was just to broadly replicate WSJ article

  6. stukuls

    Good to point out Gat Gourmet. Almost all outsourced jobs in the beginning of places where I have worked were once part of the company. The entire art department save two management employees were played off and rehired by a new company doing the same work with less benefits. Then that company was later disolved. I have seen this many times in the corporate design field now. Usually ends with disaster and he hire of folks some back to full time but most to freelance. So I guess in a way it works out for the company in the end and not for the worker. Amazing the amount of money a company is willing to lose this way then use the same to pay workers better.

        1. H. Alexander Ivey

          An excellent critique, for those who were wondering. The take away paragraph, summing up the actual work done and purpose of, the Freelancers Union:

          Still, it’s hard not to notice there could be nothing more convenient to the corporate and governmental powers-that-be than a nonprofit that takes it upon itself to placate, insure, and temper the precarious middle-class.

          As we sixties people use to say: “Right on!”

  7. Marco

    So which ivy-league management school / guru is most culpable in unleashing the whole lean-mean-outsourcing-machine monster because it’s slowly destroying my ability to remain in IT.

    1. Katharine

      I don’t know the answer to your question, but you would have to go back over twenty years to find it. What I find remarkable is that even though everybody affected in the early stages could see what a dumb, destructive idea it was, the MBA types never caught on, even though most of them were not so far up the hierarchy they could not ultimately be affected.

  8. Gaylord

    Contractors need Guilds or Trade Associations that are well organized and legally able to set minimum standards for billing and performance. This is an area where Trade Unions have failed with respect to some professions, and apparently (from what I’ve heard) the RICO statutes need to be amended to allow for this. It’s time to rig the other side to make companies think twice before replacing employees with temp workers or contractors, to keep jobs within the US, and to provide a cushion and a “floor” to those that take the risk of entrepreneurship, preventing a race to the bottom.

    1. akaPaul LaFargue

      Yes! Geographically bound temp unions or hiring halls for all temp workers allied with low-wage worker associations. This is NOT something that established unions want, so who will agitate for it?

      1. jrs

        Something like the I.W.W is what I’d like to see. Yea I know the response is: they are still around? Well not what they were long ago of course, but with the prison strike, yes around and rising.

  9. Northeaster

    “how the big company love of outsourcing means that traditional employment has declined and is expected to fall further.” –

    This line pissed me off this morning more than most other mornings. I literally just said goodbye to a long-time colleague (Big Pharma) who is being outsourced as of today. The kicker(s):

    1. The job is not high tech
    2. Employee(s) trained their replacement who are H-1B from India
    3. The company is moving the division to India

    Of note, my state (MA) is responsible for over one-quarter of all H-1B’s every year. Thankfully a few in the industry are helping get the word out, like Nanex’s Eric Hunsader yesterday. The outsourcing, off-shoring, and H-1B abuse has to stop, but not sure The People have the will to hold political office holders accountable enough to truly change this paradigm.


    1. sgt_doom

      Agreed, but I’ve been saying the exact same thing since 1980, so I’ve been lobbying and being a volunteer activist against this for many years, and yet I still run into women (not too many men anymore) in their 60s and 70s who believe offshoring of American jobs, and insourcing foreign visa replacement workers is fantastic (truly, we are a dumbed down society today, where they routinely protest on behalf of the financial hegemons).

      Best book on this (and I am no conservative and have never voted r-con) is Michelle Malkin’s book (with John Miano), Sold Out!

      This has been going on for a long time, and by design: with every “jobless recovery” one-fifth of the workforce is laid off, and one-half of that one-fifth will never find another job, while one-half of the remainder, will only find lower-paying jobs.

      And each and every time, more jobs are restructured as temporary or contractor type jobs. We’ve had a lot of “jobless recoveries” to date.

      A recent study from Lawrence Katz and Alan Krueger found that 94% of the new jobs created over the past some years were all part-time, while a study from Rutgers University a year or so ago found that one-third of the new jobs created couldn’t be verified as actually existing!

      Nothing particularly new here, as it has been going on for quite some time (another great book is Ron Hira’s book, Outsourcing America).

  10. Damian

    In every category of labor – blue and white collar – the press is on to increase the supply and reduce the demand for labor.

    The book ends: The Clintons in 92′ put thru the WTO / NAFTA – shut down 10’s of millions of jobs and factories – blue & white collar. Obama did the same, with anticipating Hillary would be elected, put forth the TTP to enable unlimited H1-b for tech workers from off shore. The Neo Liberal Democrats were at the forefront of of this 25 year Plan for labor devaluation (with Republican help).

    The Immigration Policy by government both illegal and legal were at the epicenter of increasing the supply in all categories with various programs while Obama also increased the regulations to wipe out more factories and deliberately reduce demand.

    The solution is eliminate immigration in all forms until the 95 Million are employed and wages rise by the equivalent of what was lost in the past 15 years plus Tariffs to enable a marginal cost compared to imports to allow domestic factories to expand demand.

    Increase the demand and lower the supply of labor will mean potentially a switch will occur from 1099 to W-2 as companies have to secure labor reliability in a short labor market which is squeezed.

    The Millennials sooner or later will figure it out. Identity Politics which enables a greater supply of labor and diversion of attention to intangible values at the expense of tangible values has to be substituted for Labor Only Politics.

    These young people have been duped based on the recent focus of the demonstrations. They don’t understand they were screwed deliberately and with great malice by “Going with Her”.

    1. sgt_doom

      I’ve been keeping count over the years, and as close as I can find, over 170,000 production facilities were shipped out of the country. (Or, as David Harvey phrased it: “Identity politics instead of class analysis.”)

  11. Scott

    One aspect of outsourcing that the article does not hit upon is the impact on company cash flows, which has some importance to large outsourcing initiatives. A company must pay its employees within 6 (it might be 7) days of the end of the pay cycle, which is typically two week. By contrast, when outsourcing, at the end of the month the contractor will provide an invoice, the company will then pay according to its payment cycle. This could be 30, 45, 60, 90, or even 120 days. The contractor still must pay its bills, in essence it’s providing a low cost loan to firm (which often has a lower cost of capital). This approach, including the extension of payments has been largely driven by financial/business consultants.

    1. Arizona Slim

      Story of my life!

      I’m still trying to get paid for freelance work that I did in December. This payment delay is wreaking havoc with MY cash flow.

      1. Scott

        It can actually get worse – they might not pay you at all, hoping that you’ll file a lawsuit, which will be interpreted according to the contract, rather than legislation which covers employment issues. The litigation costs might exceed any payments you’d receive.

        My guess is that this wouldn’t happen to an individual working under a 1099 (as word might get around), and very large firms often have leverage (not providing continuing services), but medium-size firms often get get held up for months and years (especially once the contract has ended).

        1. redleg

          Or they can go Chapter 7 during that time, where your almost 6 figures in billables gets paid 4 years later as mid- 2 figures.

    2. Left in Wisconsin

      Excellent point.

      Another thing the article glosses over is that most outsourcing is simply wage cutting. I have never once seen confirmation of the notion that “specialist” firms provide better services at comparable labor costs than firms can do in-house. The double-bubble is that firms (and public sector employers) often spend more on outsourcing than they would doing the work in house despite the wage savings, which all accrue to the outsourcer of course.

      1. diogenes

        When the airlines went on their deliberate BK spree in the 90’s, they outsourced flying to regional carriers. Regional a/c (45-90 seaters) have higher CASM’s than the a/c the airlines actually owned. In brief, it is cheaper to transport 100 passengers on a 100 seat a/c than to transport 100 passengers on two 50 seat a/c. That’s been a fact since the Wright brothers broke the ground.

        FWIW, SouthWest never went the regional route, never went BK and pays their unionized employees quite well.

        The BK spree was all about breaking labor, not operational efficiencies that would actually save money.

        1. d

          but now it seems the majors are not to happy with the regionals , cause customers cant tell the difference between them, the next problem is that for some reason the regionals cant find pilots. seems that pilots dont want to work for less than 30,000 a year.

    3. Yves Smith Post author

      Yes, but that is a one-time benefit. Once you’ve shifted the payment cycle, your quarterly reported cash flow will be more or less the same.

  12. PKMKII

    Another area of friction and waste with IT consulting and other contracting, is that an employee of a company simply and efficiently plugs into their existence administrative system (HR, timekeeping, payroll, etc). With a consultant, there has to be reconciliation between the vendor’s records and the company’s records, which means work hours burned matching everything up. And that assumes they do match up neatly; If the vendor says “our consultant worked 50 hours this week, pay them as such” and whoever oversees the consultant at the company claims they only approved for 40 hours, now you’ve got a mess on your hands, could potentially go to the lawyers.

  13. rusti

    The idea that companies who use contractors are more flexible is largely a myth. The difficulty of entering into outsourcing relationships gives you an idea of how complex they are. While some services, like cleaning, are likely to be fairly simple to hand off, the larger ones are not.

    I work in engineering at a gigantic multinational vehicle manufacturer and the role of “consultants” has been expanding with time. Rather than consultants being people with specific technical expertise who work on one subsystem component with clear interfaces to other things, it now encapsulates project managers and subsystem / function responsible people who need to have large networks inside the company to be effective. Considering the huge amount of time it takes to get a new hire up and running to learn the acronyms and processes and the roles of different departments, it’s a bit absurd to hire people for such roles under the assumption that they can be quickly swapped out with a consultant from Company B next week.

    It’s pretty clear that management sees permanent employees on the payroll as a liability and seeks to avoid it as much as possible.

    1. Jim Haygood

      It’s pretty clear that management sees permanent employees on the payroll as a liability.

      No doubt correct. But why is that? Over time, mandates on employers — particularly large employers — just keep escalating. Health care; pensions; overtime; layoff notifications: regulators just keep raising the ante. Employers respond by trying to reduce their profile and present a smaller target to their predators. Staying under 50 employees wins a lot of exemptions from federal regulations.

      Taken to an extreme, some developing countries (Argentina being one example) have European-style labor regulations guaranteeing job security and mandating generous compensation when employees are laid off. With hardscrabble small businesses being in no position to shoulder such risks, the result is that about 40 percent of employment is trabajo en negro, with no benefits or protections whatsoever — a perfect example of unintended consequences.

      Editorial comments such as “these [contracting] arrangements increase risks and rigidity” ignore that government employment regulations also increase risks and rigidity. There’s a balance of power. Overreaching, such as Obama’s surprise order to vastly increase the number of employees subject to overtime pay, leads to employer pushback in the form of more contracting and outsourcing. Getting whacked out of the blue with a big new liability is unfair.

      1. diogenes

        Actually, the overtime rules were an attempt to restore overtime that GWB took away:


        Concur about costs, and health care is the big one. Every other industrialized nation we compete against has national health care. Given that, why doesn’t business support Medicare for all and get health costs off their books? Plus it would be a damsite easier to start up a business if one had health care.

          1. Left in Wisconsin

            Because they, unlike us, understand class. I can state for a fact that the Big Three auto companies are well aware of how much cheaper health care costs are for them in Canada and how much better off they would be here, cost-wise, with a national health care system where McDonald’s and Wal-mart have to pay the same per hour or per employee cost as they do. But it turns out cost isn’t everything. Corporate (capitalist) solidarity rules.

            1. H. Alexander Ivey

              Yes, yes, damn yes!! It’s about your class, not your race, not your education, not your gender. As Lambert might say, identity politics (your race, your education, your gender) is used to keep your eye off the prize: economic opportunity and security.

              1. different clue

                What if class itself were to become an “identity”? Then we could have Class Identity politics. All the fun of Identity Politics, but with the practical guidance of Class Analysis.

                Class Loyalty. Taking Identity to a whole new level?

                1. Kukulkan

                  As far as I can tell, the entire point of identity politics is to avoid the idea of class. Race, sex, sexual orientation, etc. all have a biological basis, and so cannot change. That means they cross class boundaries, encompassing the rich, professional class, middle class, and working class. By focusing on these sort of identities, class differences are glossed over, with the idea that all those that share a particular identity have common interests, no matter what their economic circumstances.

                  This allows members of the elite to:
                  (i) claim the allegiance of those in the lower classes based on identity — all women should support Hillary Clinton because she shares their identity as a woman, for example;
                  (ii) use the history of oppression of those in the lower classes to deflect criticism of their own actions — such criticism is dismissed as simply another example of oppression and bigotry;
                  and (iii) use their shared identity to gain an advantage in elite competition — since lower class gays/blacks/women are discriminated against, the position should go to a gay/black/woman to make up for that, even though, as a member of elite, the individual so favored really can’t be described as oppressed in any meaningful sense.

                  If class were to become a big new form of identity, all these features would be lost. Members of the elite would just be members of the elite class and that wouldn’t give them any advantages in either claiming the loyalty of those in the lower classes or in competition with other members of the elite.

                  In that sense, identity politics is like nationalism or religion or notions of racial superiority — something that creates bonds that unite factions whose economic interests would otherwise put them in opposition, and prevents those who share economic interests from uniting because of these other differences. That way black members of the working class and white members of the working class oppose one another in support of different elite candidates, even though none of the elite candidates will do anything to improve their lot as members of the working class — or as whites, blacks, gays, women, whatever.

        1. DH

          It is also easier to have part-time workers because they are still covered by health insurance in some sort of national health insurance system. In the US, the part-time workers will have high turnover as they look for full-time jobs to get access to health insurance.

          Workers are also more likely to start their own businesses to provide services since the health insurance is just a fee they pay instead of an astronomical non-group insurance bill. COBRA insurance premiums are ginormous if you need to continue coverage after you leave a company.

          Economists have been decrying the lack of employee mobility and small business formation over the past decade or so. Health insurance is probably a primary reason for this. Obamacare hasn’t been around long enough and with enough certainty to change that dynamic yet.

          1. jrs

            It’s probably part of it, though I suspect the bad labor market is part of it as well. It’s one thing to quit a job to start a business when you think “if it doesn’t work out, I can always go back to my old career and easily be hired”, another when quitting a good job means one might not land another ever.

      2. susan the other

        haven’t seen any more info on Hollande’s “Flex – Security” plans to give corporations a way to lay off workers to improve the corporation’s revenue. French Labor was having none of it and then Hollande went negative in the polls and was done for. Our contracting out former corporation departments sounds like bad quality control at best. If the state – whatever state you can name – is going to prop up all corporations everywhere because they can no longer successfully compete then something is fundamentally wrong with the system that demands such murderous and mindless competition.

      3. d

        well there also that wage theft rules, that employers dont like. course if you look at work mans comp, you will find that it no longer works to protect employees any more. and maybe that is also why employers are get rid of employees. plus there is all of that needing to manage them. but you still end up having to manage vendors too, and while i suppose you could hire another vendor to manage the vendors (not really sure this will work out well), it still leaves the biggest problem

        since consumers are about 70% of the entire economy (always wonder if this is true. because almost all corporate ‘investment’ is done because of customer demand), seems like this business fad, will end up with fewer customers (which seems to be the way its working too, as evidenced by the falling sales figures from companies, even Apple), so it like business is like lemmings, going a cliff, because some one else started

      4. Lune

        So are you a proponent of Medicare-for-all? It would be a tremendous benefit to corporations to get out of the healthcare business and also increase employees’ willingness to become freelancers and consultants, since they’d never have to worry about healthcare.

        The truth is that citizens expect a certain amount of social welfare and security. This can be provided by 1) individuals themselves, 2) private players e.g. corporations, or 3) public players e.g. govt. Each has downsides. If you expect individuals to provide for themselves, it will less inefficient than having professional managers, and individuals will cut down on other consumption and save more, thereby hurting an economy such as ours which is highly dependent on consumption. This leaves companies and government. If companies lobby against public welfare programs like nationalized health insurance, unemployment insurance, social security, etc., they shouldn’t be surprised if government foists those requirements back on them through back-door regulations.

        To be fair to companies, most of the ones engaged in the “real economy” e.g. manufacturing, actually wouldn’t mind medicare for all, or some other program that relieves them of the burden of providing healthcare to their employees. But they’re being drowned out by the financial economy of Wall St., banking, insurance, etc. who depend on putting more money in the hands of individuals from whom they can extract much higher fees than they ever could from govt or corporate HR depts.

        If companies don’t want increased health mandates, for example, their enemy wasn’t Obama: it was the private health insurance companies that didn’t want a public plan.

      5. JTFaraday

        I tend more and more toward this view myself.

        If the state, IE we as a society wish to endow people with such entitlements, then they should be rights, preferably universal, and provided by the collectivity. We dum ped way too much on employers, mostly because them that got theirs wanted to withhold it from those that didn’t.

        Although, honestly, I still think the sainted white working class did this to themselves, and the Trumpertantrums are still taking aim at people, while carving out special rights for themselves.

        It’s their country.

    2. Altandmain

      Yeah when I worked for one of the big 3 at an assembly plant, I felt that the use of temporary contractors could have very negative implications.

      Most of the staff though were reasonably well paid, although asked to work long hours. I think though that overall, highly paid permanent workers pay for themselves many times over.

  14. DJG

    One aspect of the whole fandango that I don’t get is how the IRS allows whole departments within a company to be outsourced: If people show up at your plant or office every day to work on your tasks, they are your employee, not a contractor. Is this melting away of the idea of an employee because of lack of enforcement or some change in IRS rules that I am not aware of?

    Basically, if you control a worker’s day, and if that worker works regularly for you, the person is your employee. I don’t see how companies get away with this sleight of hand–avoiding, at the most basic legal level, who is on staff or not. [Unless the result, as many note above, is to increase class warfare.]

    1. goldie

      The company doesn’t get away with it if someone is willing to whistleblow to the IRS and said company fails the IRS 20-Factor Test (IC vs. employee). The nice thing there too, is that the tax burden will be on the company and not the employee. While I don’t advocate being a stoolie, if a company wants to screw me over turn-about is fair play. I do the best I can to avoid those kinds of companies in the first place.

    2. sgt_doom

      One aspect of the whole fandango that I don’t get is how the IRS allows whole departments within a company to be outsourced. . ”

      If I understand your question correctly it is because a federal regulation was enacted by congress (I believe one of them was faux-progressive, Jim McDermott, no longer in congress but co-founder of the India Caucus, to replace American workers with foreign visa workers from India) which forbids oversight of the foreign visa program — and yes, they established a federal regulation killing oversight of the program by the government!

      Suggested reading:

      Sold Out, by Michelle Malkin and John Miano

      1. fooco1

        Someone quoted Norm Matloff (a known bigot) above. You are now quoting anchor child Filipino bigot Michelle Malkin of all people ? It’s not helping your case.

        The H1-B program is a few hundred thousand legal tax paying people a year. There are 21 million Mexican illegals in this country. What do you think has more downward pressure on wages ? .005% H1-B (yeah, you read that right) of the total immigrant/wage pressure ? It’s idiotic and a purely bigoted worldview.

        1. Yves Smith Post author

          We are supposed to regard “a few hundred thousand” as bupkis when they are concentrated in one sector?

          The H1-B visa program has has a huge impact on wages in the IT sector and has virtually eliminated entry-level computer science jobs. This is strategically foolhardy, in that the US is not creating the next generation of people capable of running critical infrastructure.

          And the illegal immigrants do pay taxes: sales, gas, and property taxes through their rents. And many actually do pay FICA. The Treasury recognizes that certain Social Security numbers are reused many times, and it’s almost certainly for illegal immigrants. In fact, the IRS encourages illegal immigrants to “steal” Social Security numbers:


          That article whinges about possible tax credit scamming, but even that estimate is well below what they pay in FICA, $12 billion. And pretty much none of them will draw benefits.

          This is from memory, but I believe they collect over $4 billion from these SSN per year. And most of these jobs are seasonal and/or too low wage for them to pay much in the way of income taxes when they are being paid in cash.

          1. fooco1

            H1-B is not in one industry, the .005% is spread across entry level jobs in all industries: finance, automotive, insurance, arts, film, automation, etc. The total amount of H1-B is minuscule, vanishingly close to zero in a country of 300+ million and 20+ million illegals.

            You don’t seem to be complaining about the tens of millions that used to concentrated in one sector..actual manufacturing. Wonder why ? Here’s a hint: that sector used to make computer peripherals, keyboards, mice, terminals, monitors, LCD’s, chips, motherboards, pretty much everything in the USA.

            Employees in china, taiwan, etc pay zero USA taxes and they displaced millions of manufacturing jobs. And ironically, you are using an entirely outsourced computer (that actually displaced tens of millions of jobs in the aggregate) to complain about the minuscule .005% H1-B effect. A few hundred thousand entry level coding jobs (which are ridiculously simple and lo-tech, google 13 year olds getting Microsoft certified to see how low down on the value chain this is). You genuinely think writing a few for-loops (I am simplifying a little but you get the idea) is hard ?

            Certainly, way way less capital intensive and way way less barrier to entry than Hi-Tech manufacturing. It’s all going to be outsourced much faster than manufacturing was, since there is literally no barrier to entry. And H1-B is a good thing, relatively speaking, compared to full on outsourcing (just like manufacturing was).

            Like I said, the only explanation for these anti H1-B posts is plain old bigotry. No other explanation comes close.

            1. fooco1

              Might as well finish my train of thought..then I’m outta here.

              There are less H1-B visas this year than refugees, Refugees (not to mention the 20 million illegals) also put downward pressure on wages across all industries, but of course, those are all food servicing/picking/janitorial jobs and who cares about those people right ? (sarcasm for the impaired)

              So, coming back to H1-B’s..let’s take the logical alternative and ban all H1-B’s entirely and deport the ones on H1-B visas. What happens then ?

              1) They can do the job exactly as well remotely (all they need is email/internet/skype).
              2) They get paid even less (but more than zero).
              3) They pay no taxes.
              4) Their output is words..code is the same as prose and math. Good luck banning math/words..if it can be printed on a t-shirt, it ain’t bannable. (See the famous bernstein crypto case from the early 90’s for a illustration of this).
              5) And finally..there are zero new jobs added for native USA’ians (which would now cost more, given the alternative).

              It makes the situation far worse than it is today. There is fewer local coffee shop selling coffee, fewer rental units getting rented, fewer groceries getting bought, cars being purchased, etc.

              For a easily displaceable and low barrier to entry coding gig, there isn’t any easy answer. H1-B’s are actually the best solution (or at the very least neutral), not the problem.

        2. FluffytheObeseCat

          The H1-B visa program is operated so as to wreck the bargaining power of native born young U.S. workers. Young Americans are increasingly likely to be nonwhite AND from the less valued (not Asian) subgroups of nonwhite. The damage H1-Bs do to our white Baby Boomers is almost incidental at this point; they are aging out of the workforce. And given the intense age bigotry of the IT subculture, they are not a factor within it at all at this point.

          H1-B visas lock our striving, capable working class young people out of upward mobility. Kids who are now graduating from say, San Jose State with skills as good as those of South Asians don’t get jobs that they are qualified for, because they are shut out of entry to the business. They are disdained in Silicon Valley because the majority of entry level conduits to employment are now locked up (via social contacts, and “who-you-know” relationships) by men from the subcontinent.

          Your race argument is pernicious and I suspect, promoted in the full the knowledge of this fact. It is a great shame that we are relying on kooks like Malkin to promote obvious truths, but the shame belongs to our morally derelict ‘liberal’ chattering class, not those who listen to her and her ilk for lack of other sources.

  15. vegeholic

    An underappreciated aspect of contracting versus cultivating your own employees is that it hollows out the organization to the point that it may no longer have competence to perform its mission. Having an apparent success at contracting out menial tasks, the temptation is to keep going and begin to contract out core functions. This pleases the accountants but leaves the whole organization dependent on critical talent that has very little institutional loyalty. When an inevitable technical paradigm shift occurs, who can you count on to give you objective and constructive advice?

    Costs of training and cultivating employees are high, and it is tempting to think that these costs can be eliminated by using contractors. It is strictly an apparent, short-term gain which will in due time be revealed as a strategic mistake. Do we have to learn every lesson the hard way?

    1. Portia

      yes, and when I read that Pfizer farms out research, I also wondered if retention of the outsource company contract is results-related. could new drug results hinge on a company wanting to keep their Pfizer contract by telling them what they want to hear?

    2. Ann

      Agreed. Every time a company offshores jobs or goes through another round of layoffs, it loses its institutional memory. This is particularly acute in the mainframe IT systems that prop up the TBTFs (yep, they offshored these too). After a while, nobody understands exactly how these systems work and can only get to the bottom of them by reading code, which is a pretty flawed way to learn the business. This has been going on for years and nobody cares.

    3. wilroncanada

      It pleases the accountants, that is, until their jobs too are outsourced. First they came for the janitors…

  16. Denis Drew

    Centralized bargaining — a.k.a., sector wide labor agreements — is the only strategic answer to contracting out. Done in continental Europe, French Canada, Argentina, Indonesia.

    (Take a vacation from reality with Soma — one gram and I don’t give a damn.)

  17. L

    The one word I don’t see in your excellent writeup is loyalty. Companies, like countries depend to a great extent on social constraints to keep people committed to the group. You cannot monitor all people all the time and doing so causes them to turn against you. But companies staffed with contractors and temps and temps supervising contractors have no loyalty to the company. Ergo no one employee has any reason to go the extra inch or to turn down the chance to sell out for personal gain should the opportunity arise.

    All that imposes real costs that companies conveniently ignore because they are not always realized in share price.

    1. PhilM

      I was going to add the same thought, but use the label “goodwill.” It is something that appears on balance sheets in enormous amounts depending on what the accountants think it may represent.

      There is a “goodwill bank” in the labor pool of any given company, and when the balance hits zero, the company will fail, “emigrate” its capital, or go public to the greater fools. Companies are engaged in a savage race to the bottom that is inherent in corporate structure: executives are now playing with somebody else’s money, and somebody else’s life. If corporate liability were suddenly returned to the days of the partnership, what a change we would see. And those days were not so long ago: Wall Street remembers the 1960s.

      PS What a treat to come here and see informative journalism and commentary instead of the monkey cage.

  18. oliverks

    My daughter was recruited and interviewed by Genentech and then sent to work for an organization called PPD. PPD did nothing in this relationship, other than take money from Genentech pocketed about 1/2 of that and then pay her the rest. I really couldn’t figure out what the heck the point of this was, other than some long running strategy to ultimately depress salaries of Genentech chemists.

    1. DH

      One of my kids works in a unionized metal foundry (they still exist in the US!). When they need new workers, they bring several in through a temp agency for several months. If they can cut it and are acceptable, then they get pulled into the union or into the plant management team. This allows them to try out several people on a rent-to-own basis, but in the long run they become loyal company employees with very low turnover.

      1. jrs

        Contract-to-hire is not new. The problem from an employee perspective is trying to evaluate when a company is actually serious about hiring if the contractee does a good job, and when it’s just empty promises and they have no intent of making full time job offers at all.

    2. DH

      BTW – the Genentech scientists probably get a bunch of benefits like bonuses and stock options, etc. that are not available to the contract workers. They probably have more protections if they are terminated or laid off whereas the contract workers would be done that day. The really good contract workers may get offers to work at the company for the long-run.

  19. j84ustin

    Outsourcing is done in the public realm, too; my first job after grad school was with a major housing authority – except it wasn’t for them (despite me having a “housingauthority.org” email address). I worked for a contractor of the housing authority, who paid us shit and treated us like cattle. I lasted three months.

    1. jrs

      Oh yes it definitely happens in the public realm, a lot with local government, more and more it seems.

  20. akaPaul LaFargue

    One area not discussed in this post is municipal outsourcing. What this means in practice is the loss of organizational memory…. assuming that records are not adequately maintained since the “old-timers” were still around. But with the loss of human memory banks, no new ones (digital?) have taken their place. Further, when consultants are hired for a specific project, when they have completed that project, what they have learned as ancillary knowledge is lost cuz the end-product is all that counts, not the process.

    1. Dave

      i.e. Rip up the entire street to find where the pipe is because the old public works director who was replaced with a bright young woman with a degree before he qualified for his pension, got even and deleted the maps on the software. :-)

    2. wilroncanada

      Didn’t Yves mention this loss of institutional memory in reference to fianancial services, or was it banks, and their IT?

      Further to government outsourcing:
      Back a few years my wife and I worked for a school district on the East coast of Canada. The janitorial service had been outsourced a few years previously, with the former head janitor becoming the main contractor, who then hired other cleaning staff to work for him. He/she was already being squeezed to reduce his rates, leading to work not done or his working from 8AM to midnight to save an after-school employee. So–lower employment overall, all at minimum wage, including the main contractor.

      One district had bucked the province-wide trend by keeping its own cleaning staff. Visiting the schools in that district those few years later, one could see the result, in vastly superior level of cleanliness, better co-ordination between admin and teaching staff with cleaners, and much better relations with students as well.

      The staff weren’t bosses, the cleaners weren’t minions, and the students weren’t customers. They were a team.

  21. Glen

    I don’t think there will be a change in this because it’s too profitable for the CEOs to strip mine the companies assets (knowledgeable employees are an asset) for maximum “shareholder value” (always replace “shareholder value” with “my compensation”). I suppose this will change when all companies are stripped to the bone and go under. But we now call these “too big to fail” and prop them up with taxpayer dollars.

    We need to change incentives. These might help:

    Make corporations really pay taxes so that it makes sense to invest in the company rather than strip it.

    Don’t prop up TBTF companies, let them fail so that many small companies can grow.

    Stop all the fraud and corruption. Send corrupt CEOs to jail.

    Medicare for All would be a boon for businesses, especially the smaller and mid-sized ones.

    Herb Kelleher, CEO of Southwest, was once asked where he ranked shareholders vs employees. He replied employees were first (because if the employees are not happy, then the customers are not happy), customers (they pay the bills), and shareholders (they buy and sell shares in seconds). If the company is successful, the shareholders will come. We somehow need to get back to these company values. A successful company starts with the employees.

  22. JimTan

    Wow – good post.

    This is a pretty ugly development in our history. The ‘end of employees’ is a very accurate description of what is going on in our gig economy related to a specific legal contradiction. In the U.S., we’ve adopted a vast body of labor laws ( many in response to the Industrial Revolution and Great Depression ) that are primarily designed to protect “employees” from exploitation. Buried deep in our tax law is a second designation for worker called “independent contractor”, defined as a self-employed person providing services to other businesses that is exempt from most labor laws on the principle that a self-employed person can’t exploit themselves. The key here is labor laws protect ’employees’ from ’employer’ abuses. Changing a workers classification from employee to ( self-employed ) contractor, will change an employers classification to customer, and remove the workers legal protections from exploitation. Labor law protections include minimum wage and hours, workplace safety and health, wrongful dismissal protections, anti-discrimination protections, employee benefits security, and worker compensation protections. This contradiction is allowing many companies to sidestep centuries of laws enacted to stabilize and and protect our society. Some companies push this power imbalance even further by transferring many of the business costs associated with their revenue to employee contractors ( see Uber ).

    Hopefully when there is enough public outcry, regulators and prosecutors will decide to challenge these interpretations of existing laws and force businesses back in line regardless of their political influence.

      1. JimTan

        Incidentally, the slippery logic that removes labor law protections by classifying a worker as self-employed ( both employer and employee ) might also grant businesses protections from their workers via consumer protection laws against fraud and unfair practices ( when businesses become customers of their now self-employed former employees ).

  23. vegeholic

    As has been stated several times, sometimes government entities are the worst offenders here. Grover Norquist & Co. insisted on shrinking the size of government. The obedient elected officials and managers immediately replaced employees with contractors and could claim that they had indeed reduced the size of government. Unfortunately the budget probably went up since we now have to provide profit for the rent extracting contract vendors.

    1. redleg

      They replaced govt employees with their contractors.
      Dual purpose- Eliminate the government’s ability to govern while capturing the tax revenue.

  24. Democrita

    A few years ago I was working for a family of local weekly papers, run on a shoestring (of course) with pathetic salaries for the tiny staff. At one point, they heard about possibly outsourcing design–layout of modular pages–to cheap labor in Romania. But when they ran the numbers….our in-house designers were already cheaper than the Romanians!

    Second point: At my current magazine I am one of just two full-time staffers on the edit side. Our copy-editor/proofreader is paid on an hourly basis, and works off-site. Our designer works on a monthly retainer, off-site. And so on.

    That makes the relationship between us and our workers competitive and antagonistic: They try to do the least amount of work, and we try to pay the least amount of money. So when the publisher wants to be “innovative” or try something different, the designer resists. He doesn’t want to spend any more time on us than he normally does. So we don’t do anything well, we get by with just good enough.

    Point 3 – institutional knowledge: One of our key competitive advantages has been/is being eroded because there are things we haven’t done in two years due to turnover. When I arrived and took up one such project, hugely important to the company’s bottom line, no one could tell me how it was done. Everyone who had been involved in it was gone. We’ve now spent several months reinventing this particular wheel.

    But the publisher doesn’t see that as money. He only sees money as money.

  25. DH

    BTW – the financial sector is ripe for this. Automation is taking over many positions and people in active investing is getting slashed big-time. Ironically, places like Vanguard may actually be some of the last bastions of actual employees.

  26. Detrei

    The problem with these short term contract jobs are immense. Employees that don’t have a steady income have difficulty getting loans for cars or homes. They certainly have less protection too. Our son worked for SKY TV as a part time employee through a temp agency for 3 years, working 40 hour weeks. But when an unstable full time employee assaulted him, in front or several witnesses, he was the one fired on the spot without explanation. He was a non-person. The temp agency didn’t want to get involved for fear of losing their contract. With no union, no rights and little money, there was little he could do. They knew he couldn’t afford a lawyer and involving the police wouldn’t get his job back. This goes on all the time now. 20 years ago would have been unthinkable. I see a revolution coming, in many countries…

  27. Pelham

    Given the long evident fact that our corporate owners and their servants in government will not do a bloody thing to make life better for us, what can we do? As a first step toward any solution, we need to recognize that nothing is possible within the narrow boundaries of our political and economic system.

    1. Vatch

      What you describe as a first step seems a lot like a claim of inevitable failure. Rather than expect failure, I recommend as a first step that we try to block a few of Trump’s predatory cabinet nominations. Andrew Puzder, the nominee to head the Labor Department, and Steven Mnuchin, nominated to be the Secretary of the Treasury, seem to be very relevant to the scope of this article. Also Tom Price, nominated to be the Secretary of Health and Human Services. Tell your Senators that you don’t want them to be confirmed. It’s easy, although you might need to make a few extra phone calls, because the Congressional phone lines are often busy these days.


      Sorry, I know I’m being repetitious. But it’s better to do something positive than to bewail our political impotence.

  28. JEHR

    I ask, Why can’t banks be fully automated? You wouldn’t need CEOs and COOs and CFOs in banks because IT can do all those jobs automatically. Then we would find out that we only need ONE bank–the central bank and, voila, the banks no longer can create money by making loans. (I’m sure there is a weak point in this argument!!!) However, I can see something like this happening in the future if only we separate investment banking from commercial banking.

  29. Sound of the Suburbs

    Marx saw capitalism as an endless class struggle between the bourgeoisie and the proletariat.

    He wasn’t far wrong.

    1920s – high inequality, high banker pay, low taxes for the wealthy, robber barons, reckless bankers, globalisation phase (bourgeoisie in the ascendency)

    1970s – low inequality, worker and union power, high taxes on the wealthy (proletariat in the ascendency) (probably more true in the UK than the US)

    2000s – high inequality, high banker pay, low taxes on the wealthy, robber CEOs, reckless bankers, globalisation phase (bourgeoisie in the ascendency)

    The pendulum swings back and forth and always swings too far in both directions.

    If the human race could take a more sensible, big picture view they might see it as a balance between the supply side (bourgeoisie) and the demand side (proletariat).

    The neoliberal era has been one where a total ignorance of debt has held sway.

    Redistributive capitalism was removed to be replaced with a capitalism where debt based consumption has become the norm. without a single mainstream economist realising the problem.

    The world is maxing out on debt, this system is set to fail due to a lack of demand. The Bourgoisie have been in the ascendency and made their usual mistake.

    “The Marxian capitalist has infinite shrewdness and cunning on everything except matters pertaining to his own ultimate survival. On these, he is not subject to education. He continues wilfully and reliably down the path to his own destruction”.

    Keynes thought income was just as important as profit, income looks after the demand side of the equation and profit looks after the supply side.

    He has the idea of balance.

    Just maximising profit – The Bourgeoisie looking after their own short term, self interest with no thought of the longer term.

    1) Money at the top is mainly investment capital as those at the top can already meet every need, want or whim. It is supply side capital.

    2) Money at bottom is mainly consumption capital and it will be spent on goods and services. It is demand side capital.

    You need to keep the balance.

    Too much capital at the bottom and inflation roars away.

    Too much capital at the top and there is no where sensible to invest and the Bourgeoisie indulge in rampant speculation leading to the inevitable Wall Street Crash, 1929 and 2008.

    Today’s negative yield investments?
    Too much capital at the top, no one wants it and you have to pay people to take it off your hands.

    1. Sound of the Suburbs

      We are actually using 1920s economics, neoclassical economics.

      No wonder everything looks familiar, the Bourgeoisie have no imagination.

      “Stocks have reached what looks like a permanently high plateau.”Irving Fisher 1929.

      In 2007, Ben Bernanke could see no problems ahead.

      Their beliefs were based on an absolute faith in markets based on neoclassical economics which states markets reach stable equilibriums.

      We should actually learn from mistakes, not repeat them.

      1920s levels of inequality – what a surprise it’s the same economics.

      We have moved on to the 1930s now:

      1930s/2010s – Global recession, currency wars, rising nationalism and extremism

      1940s – Global war

      Something to look forward to.

    2. jerry

      “You need to keep the balance.” The post war era was balance, that was the middle of the pendulum swing, we have never seen you’re next sentence:

      “Too much capital at the bottom and inflation roars away.” When? Name one instance outside of extraordinary political situations like weimar germany and zimbabwe where this has occurred?

      Inflation is the boogey man that the elite throw around to scare us into submission. They don’t care when its inflation of house prices, they don’t care when its inflation of healthcare costs, education costs, etc. etc. But they damn sure start sweating a lot when its the cost of labor that goes up. Shocker.

      Check my article about this very topic (shameless self promotion) : https://marginallyattachedblog.wordpress.com/2017/01/04/inflation-worries-from-trump-fiscal-stimulus/

  30. FreeMarketApologist

    “Gate Gourmet had once been part of British Airways. And passengers blamed the airline.”

    You can transfer expenses, you can transfer legal and regulatory liability risk, you can transfer financial risk, but it is virtually impossible to transfer reputational risk. Companies who think they can do so (or ignore the fact) do so at their own peril.

  31. Barbara

    My d-i-l, a research professional, has survived five down-sizings, assuming an additional work load each time. The last time she also got a small promotion (well, you’d think they’d give her something positive after all this). To myself I thought, they’re going to wear this woman out till she has nothing left to give and dump her.

    It’s worse. The corporation (company is a concept from my early working days) just announced that everyone would have to bid for their projects(jobs). What this means of course is “how much are you willing to give?” not to mention pitting one employee against another.

    Not prescient enough, was I?

  32. jerry

    Love the article.

    I “work” (temp/contract/no benefits) at a large multinational electronics company in cust service and have seen this first hand. In response to a couple years of dropping profits, they outsourced the entire department (couple hundred employees) to the Philippines. They cut full time employees, replace them with temps for half the pay, because people will do it, and we live in desperate times with no bargaining power.

    As someone mentioned, its a negative feedback loop, less demand, less employment, less demand, until the whole world is greece. We won’t make it through another world war, the world is too globalized, too connected, too advanced technologically. We need a relatively peaceful populist revolution – which we seem to be seeing the first real signs of – or our species is done for.. and the sad part is I’m not even exaggerating.

  33. sgt_doom

    Best overall reading list on this subject:

    Sold Out by Michelle Malkin

    Outsourcing America by Ron Hira

    America: Who Stole the Dream? by Donald L. Barlett

    One Nation Under Contract by Allison Stanger

  34. Dick Burkhart

    One point you missed is that a company cannot manage, let alone write a contract very well unless it has sufficient expertise on staff. It is not sufficient to hire a consultant unless that arrangement is more or less permanent. Too many things can go wrong, as they often do even with competent staff when projects are complex or innovative.

  35. ultra

    IT contractor here. Over here in Europe, the more skilled people prefer to work contract, because the pay is higher. Meanwhile the client (a private bank) is performing the yearly ritual of attempting to get people to go internal to save costs.

    Counterpoint to your story…

  36. Ep3

    Come on Yves, think of the bigger picture. Instead of the hassle of being a wage slave earning a w2, now a worker can be a sole proprietor (the American dream! Being a small business owner!). From a tax perspective, then, you can claim all those expenses on your tax return, and get the same deductions as rich people get. Then, everyone is paying $100 an hour to have a cpa. And that flows through to more cpas being hired (as independent contractors of course). And now that businesses aren’t burdened with the costs of fica and unemployment insurance expenses (and workers comp insurance!), employers can pay contractors more money (well, marginally more, where the contractors’ after tax pay is actually less than if having a w2. But since this is America, if you are the hardest working and the smartest person, you will figure out how to turn those less earnings into more money. You just have to pay for the best cpa and best attorney. And since we are dismantling any investigative powers of the IRS, no one will get audited anymore! Deduct everything!).
    And since everyone is now on equal footing (as a contractor), the smartest will provide the cheapest service. And businesses will realize huge savings from not hiring all these workers. That will translate into even more investment. Contractors can sit around with friends and brag about who has the most 1040 deductions (a game of “who has the largest ****s?”).

  37. brooklinite

    I admire the article. I used to be a consultant for almost 8 yrs before I became a full time employee for various arcane reasons. I used to live in a four bedroom apartment with 3 other roommates. My rent was around 900/month. I saved almost every penny of my pay check. I didn’t make big purchases, had less balance on my card. Now that I have a full time position I am spending my future earnings like wall street trades on future earnings. I realized it and started saving it back again. You are absolutely right. I am one of those contractors who would have never thought about having a wife, kid and a home if I was contracting. Affordable care act was taking almost 550-600 a month out of my paycheck. Now I pay meager 110/month. I feel bad for all the contractors out there.

  38. ewmayer

    And this trend is a global one. My sekrit TV pleasure is Korean dramas – I first got hooked on the historic costume dramas about 10 years ago, and in recent years have also started watching some of the contemporary ones. One of the local K-TV cable channels recently ran a few-years-old 20-part series called The Queen of Office [sic]. It’s an office comedy/romance/farce, but with a serious tale of the rise of a 2-tier workforce as a backdrop. Here is the title-sequence narration:

    It’s been 16 years since the Asian financial crisis
    Korea now has 8 million contract workers
    South Koreans’ foremost dream is no longer national reunification.
    It is getting a permanent position.
    While everyone else yearns for a permanent position,
    There is someone who has consciously opted to be a contract worker.
    Ms. Kim is Korea’s first ever contract worker by choice.
    Ms. Kim never works for free.
    She doesn’t forge cumbersome interpersonal ties.
    After her three-month contract period, she always leaves Korea.
    But no one knows how she’s come to call herself “Ms. Kim” and chosen to be a serial contract worker.

    Of course in this fictional play, Ms. Kim does the exact opposite of what at-will-employment-for-low-pay-and-0-job-security-or-prsopects-of-advancement generally results in – she manages to amass the kinds of experience in each 3-month stint which normally requires decades of work at a job and the kind of dedication that results from employer/employee reciprocity, the latter being near-extinct beasts in the modern ‘globalized’ jobs landscape. But the series does a good job conveying the financial/employment/family-life parlousness suffered by her less-exceptional fellow contract workers.

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