It is generally agreed that one cause of wage stagnation comes from companies shedding labor and replacing workers by outsourcing and contracting out to businesses often deploying lower-paid labor, the result of which is to depress wages. There’s general agreement, too, that one of outsourcing’s consequences is that equally skilled workers may earn very different wages depending upon the kind of firm for which they work.

Companies don’t always outsource and contract out for financial advantages. The issues are becoming increasingly complex. The objective is no longer simply attaining savings in custodial services or non-core competencies. Off-shoring of customer service and even highly technical skills is now commonplace; franchise arrangements abound; the continued growth of the corporate financial model (private equity) influences company organizational behavior; and most important, the emergence of “production networks” is breeding new types of inter-firm dependencies which thrive on creative shared/contracted relationships. Therefore, while factors such as market concentration and monopsony are growing contributors to wage stagnation, the changing dimensions of 21st century outsourcing—whether up, down, or across a global supply chain—challenge the ability of policymakers to successfully craft worker protections in the rapidly changing structure of production and work.

Although RAMP is not designed to combat outsourcing, it likely will have a restraining effect on outsourcing in circumstances where reducing labor costs is a primary consideration. Moreover, when outsourcing does occur under RAMP, it will benefit remaining workers and those laid off more than is currently the practice. To the extent that labor-cost considerations form the basis for a RAMP participant’s specific company decision, in no case will the program act as an encouragement to outsource or contract out, or to adopt any other labor-shedding practice.

Under all outsourcing and contracting out scenarios involving workers in the bottom 90% (B90 workers), the RAMP structure requires a company to restore a significant part of any drop in the Compensation Ratio (CR) beyond some allowable bound. Since neither outsourced workers nor contract workers are employees of the company, RAMP would not consider their compensation to comprise a part of the company’s total compensation going to their B90 workers. Therefore, the company’s CR would drop to the degree that the outsourcing or contracting out results in layoffs of their B90 workers, has negative effects on such workers’ wages, and/or increases occur in profits but not in compensation to B90 workers.

When considering engaging in outsourcing or contracting out under RAMP, then, the company would have to assess the impact of restoring to the remaining B90 employees a sizeable part (our model currently assumes a half) of the compensation that would otherwise have been paid to the affected B90 employees. When added to the actual costs of the outsourcing arrangements themselves, this requirement could change the critical math of companies’ decision-making process. In particular situations when non-financial, strategic circumstances are marginal, RAMP will likely serve as a disincentive on outsourcing and contracting out that does not currently exist. The financial disincentive on outsourcing from RAMP’s operation in these situations would occur in any case where, from a financial standpoint, the projected savings on labor costs are beneath substantial (by our calculation, RAMP would act as a disincentive to outsourcing in these situations when the labor-cost savings anticipated from outsourcing fall beneath 35% of otherwise expected labor costs).  Furthermore, under RAMP, when outsourcing and contracting out do occur, the remaining rank-and-file workers and those laid off will gain an appreciable benefit from the savings whereas that is not now generally the case.

As RAMP evolves and as industry practice and its benefits are proven, it will be important to consider a requirement that any new outsourcing and contracting out arrangements be made only with companies that are or become participants in the RAMP.

Might companies try to game RAMP by deploying the tax redirection to pay higher wages to workers in (say) the middle-third of the pay scale while outsourcing and laying off lower-paid workers whose combined wages are equivalent to the amount of the tax redirection? They could try. But, such actions are detectable and can be prevented through the mechanism described here, assuming detection is backed by appropriate remedies/penalties. Any equivalent gaming possibility could also be strongly discouraged by eliminating some or all of an individual company’s proposed tax redirection.