In an advertisement for a professional employment organizati

In an advertisement for a professional employment organization it was stated: “Outsourcing can be a cost-effective alternative to the expense and administrative burden of a traditional employer-employee relationship.” Evaluate the costs and benefits of outsourcing employees. What market-failure problems could be created or eliminated by outsourcing?

Solution

By outsourcing, an organization can evade many of the costs related to managing the employer-employee relationship. If the organization providing the outsourcing service charges a fee less than the parent organizations costs of doing the same thing, then outsourcing will be more cost effective and will make more sense. However, a principal/agent relationship is created. However, will the provider of outsourcing organization look for the same type of employee that the parent organization would have looked for? The employees now have a connection with the provider of outsourcing and not the organization where they are assigned