Verizon outsourcing case is a can of worms

Reuters.

An ATM is demonstrated at the Verizon booth at the Consumer Electronics Show in Las Vegas.

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One of the most significant developments on the labour, and indirectly tax, front in recent years seems to have been overlooked as we all focus on the hilarity of a mid-ranking employee outsmarting his employer by outsourcing himself.

The employee, who is now an ex-employee, had a mid-level job at technology firm Verizon. At some stage, he decided he had better things to do with his time and worked out how to outsource himself to a firm in China. If you overlook the dishonesty involved, the arrangement appeared to create a win-win situation for all concerned: the employee got to keep most of his comparatively large salary and spent his day surfing the web, there was a work opportunity created for someone in China and Verizon reported that the employee turned in above-average work.

The fact that he was fired when the ruse was discovered reflected a surprising intolerance of his pro-active, indeed entrepreneurial, approach to work. Perhaps Verizon believed the man was employed not so much to get a job done as to do a job. He succeeded on the first count, but failed utterly on the second. Or perhaps Verizon felt cheated out of an outsourcing profit.

Having dismissed him one thing is certain, Verizon will be trawling through the ranks of its employees to see what opportunities there are for more of this type of outsourcing. And this will not only be done by Verizon, it will be done by all sorts of companies in the US and across the globe.

What the Verizon employee has done is lay the groundwork for a new generation of outsourcing. This will be devastating for the targeted employee, but it will be great for shareholders and very senior executives. In no time at all, the staff complement of even the largest companies will comprise only the executive directors and a handful of critical employees who are there to manage the complex outsourcing balancing act.

And of course, to the extent that the corporate bottom line benefited from this second-generation outsourcing, share prices would surge and dividends would flow, resulting in automatic benefits for shareholders. This means that the executive directors who have managed to cling onto their jobs will see their remuneration packages reach stratospheric levels.

The surge in share prices would also make trading in shares and all their derivatives more attractive, which would enhance the returns to fund managers and increase their rent-seeking opportunities.

All of this will of course mean that unemployment outside China, Vietnam and other “low-cost” sources of supply, is set to soar. It will not just be the likes of textile workers who will be affected, it will be higher-ranked individuals who are not accustomed to being the victims of the whimsical demands of management cost-cutting.

But fewer employees means fewer tax payers and fewer employment opportunities means greater demand for government-provided social services. The government might be able to ease the resulting pressure by outsourcing huge chunks of its responsibilities and costs, but given the recent revelations about its large “consultancy” bill, this may not result in the sort of win-win situation created by the Verizon employee.

Given that the loss of employee tax would not be made up by an increase in tax from corporate profits, a desperate government might be tempted to increase not just the corporate tax rate but also the tax on executive remuneration. Until it was reminded that any such move would result in the company and its executives decamping, or outsourcing themselves, to a more tax friendly regime such as Russia.