Outsourcing

Yeah, the Indian Times has some circular logic there. If Indian wages rise, then no one will outsource. But that will drive down Indian wages!

I don’t know the answer to Arnold’s question, but I think that we are going to find out. With all the “me too” plans to outsource floating around in corporate America, the supply of Indian programmers will be strained. They might not reach American wages, but they WILL be more highly paid in the near future.

I was thinking about Indian outsourcing while doing my taxes. If W2s and 1099s are ever made available electronically, I bet that a good deal of tax preparation might even move offshore.

In India the labour market for computer programmers is already becoming saturated. Couple that with the buergeoning tech competetion coming from China, the wages for an Indian programmer will, more likely than not, be forced down. As for the equilibrium levels of wages in India, for a computer programmer, they will nominal fall to their nadir in around 5 years, and large segments of labour will idle. Ironically, the Indian computer programmer will be griping about outsourcing too. Indeed, the projected growth of GDP in China over the next decades will surpass that of the US. Likewise, pressure on labour markets will drive wages down generally. Until a catastrophic event thins labour, wages will be low.

Allow me to tendentiouly quote from an essay by Arnold Klig on Comperative Advantage. It relates to Equilibrium, wherein he states, ambiguously, that:

General equilibrium implies that you can have low wages with low productivity or high wages with high productivity, “but never low wages with high productivity”

How So?

The wages of workers in a particular industry in a given country depend not only on the productivity of the workers in that industry but also on the average productivity of the labor force in that country.

That will tend to make the Indian programmers’ wages lower than the American programmers’ even if the former are just as skilled as the latter.

Question: is the above factor large enough to offset the cost of outsourcing?

Xavier, my wife says that she can tell when she is speaking to someone at an Indian call center. She is the least political woman on earth, and could care less about the economic ramifications of outsourcing. She just finds it disingenuous to have someone in India ask her about the weather in Chicago when she just wants to switch phone plans on AT&T, or whatever.

Economists . . Don’t forget we can outsource economists, also.

I thought that wired article was terrible, and I have been wanting to vent about it, so here goes. Ok so indian programmers are good people deserving of jobs. This seems pretty non-contravercial. So let me introduce you to a few of them, little rhetorical slight, now don’t you feel bad for opposing outsourcing. Not quite…

It goes on to talk about all different threats to american jobs in the past, these all worked out fine. So there really isn’t any problem it will work out again? That certainly follows…. Furthermore the rhetoric of todays programmers sounds similar to protectionist and ludites of the past, thier arguements must carry the same wieght, mustn’t they?

Well first there are important differene between what is happening now and what happened to manufactuing jobs, or to auto companies in the 80s. These difference may or may not matter but they exist. Technological change makes skills irrelevant, but the skills today are still clearly needed. Cheaper labor, which cause the exiting of our manufacturing centers, may have made things cheaper over all, but to assume that it benefits all of us equally you need to assume regional homogenuity. Competition may be inevitable especially when the US was sell substandard products(pinto anyone), but that is not analgous to todays situation. Automanufactuing is low skilled work, thus adjustment cost of retraining are less. Further we are not facing competition from other countries firms, but from their workers. Things may still work out fine the invisible hand may move things in the right direction, but who knows, this slightly different set of circumstances could produce a different outcome.

I argue that what is happening now is exceptional. Knowlege workers are so expensive to train, and are highly subsidized. Not to mention the oppertunity cost of CoSci PHD. These are people who made $200,000 bets with thier lives. We were assured as tech workers that we would be needed. There was very high demand in that field. These are higher losses then a seemstress that has her job exported to indonisia. Retraining to a comparable job would take no time at all.

The entire creativity theme in the article is just bizzare. THere is no creativity gap between the US and India, or china, they are just as creative and still work for less.

There is also the whole theme of American exceptionalism that runs through the article. Becasue our economy has always done well trade it will continue too. The fact that other countries have done really poorily while facing forign competition, that is often in some ways unfair, think african farmers, has nothing to do with us, because we are america, our currency will never spiral out of control, deflation could never happen here.

I am actually fine with outsourcing. I just don’t think its an open and shut case. Plus, I am open to slowing down the pace because people change more slowly than markets.

While I feel sorry for the Compsci PhD who says he’s blown 200 grand on a degree, why should I be required to support his business miscalculation by paying higher prices? Please note that I’m a 44 year old Pittsburgh based unix sys-admin who sometimes telecommutes, so I’m ripe for replacement.
I’m not terribly worried though. I’m constantly training and providing good value for my employer. I can be trusted, with classified systems if needed. And lastly I’ve worked 3 different jobs so far since college, in different fields, following my curiosity, and I’ve had a good life and have managed to save for retirement. It’s not that hard to find something useful to do if you’re willing to work, and people will pay you for that trait.
If you’re a fast enough study to get a PHD in any field and you stop whinging and start working you’ll find you can support yourself pretty well.

Mathew’s post is an example of why I have very little sympathy for programmers.

He resorts to nothing more than sophistry in explaining why he was comfortable with outsourcing autowork, but now that his job is vulnerable, we should all be protectionist.

I would say that most software that I use is equivalent to a Pinto in terms of performance and quality.

Here is another clue: tool and die workers are more skilled than CS PhDs. The apprenticeship process is way longer.

There is more to making an automobile than bolting togehter some parts, and most of the skills involved are just as hard won as learning C++, or whatever the heck you do.

As someone with an engineering degree, and whose natural place is probably in a manufacturing business somewhere, I hope that MORE service jobs are outsourced. Maybe it will make US manufacturing more competitive, and it certainly will provide more markets for US goods.

The Chinese and the Indians have to do something with all those trade dollars that they are earning.

1) They can recycle them into T-Bills, thereby lowering US interest rates and funding our budget deficits cheaply, and making the US more competitive through low taxes and cheap capital.

2) They can just sell back the trade dollars, which lowers the dollar versus their currency, making the US more competitive.

3)They can buy US assets, investing in the US economy, which makes us more competitive.

4) They can buy US goods and services.

Any way you cut it, it is impossible for the most dire predictions of the protectionists to come to pass. There has to be an equilibrium somewhere. I am not done reading the Wired article, but I think that that is their point.

I argue that what is happening now is exceptional. Knowlege workers are so expensive to train, and are highly subsidized. Not to mention the oppertunity cost of CoSci PHD. These are people who made $200,000 bets with thier lives. We were assured as tech workers that we would be needed. There was very high demand in that field. These are higher losses then a seemstress that has her job exported to indonisia. Retraining to a comparable job would take no time at all.

1. Computer Science Phd’s are probably do not cost $200K unless you go after it in the most expensive manner possible.

2. Computer Science Phd’s are hardly worthless. Even if you were doing an entire career change just the fact that you have a college degree provides a base of income to build off of.

3. Productivity is what matters. If you’re able to produce quality product then there is no problem with outsourcing. America didn’t get its manufacturing base because it had cheaper labor than Europe, it has more productive labor than Europe.

The equilibrium question is interesting. First, let’s not lump all IT professionals together. Call center techs are a far different skill set from programmers, who are not interchangeable with system designers.

A few things developed here have expedited the migration of jobs. Here are just two:
– better system design methodologies, which allow the coding and testing functions to be broken out more completely than in the ‘old days.’
– better programmer productivity tools, making relatively ordinary coders more productive.

In short, we have to an extent commoditized the less creative and more routine end of system development. To the extent this is true, I would expect real wage differentials (at the low end of the skill and experience spectrum) to reflect true relative costs pretty quickly. We will retain the majority of system design functions for various reasons, not the least of which is proximity to the customer. One skill set that must be in rising demand is the ability to manage a project with a combination of local and foreign teams contributing to the end product.

Team Canada;

“General equilibrium implies that you can have low wages with low productivity or high wages with high productivity, “but never low wages with high productivity”

“Expand on that point?”

Ok.

Consider the recent story of Cambodian factory workers bribing factory insiders to get a job that pays less than the infamous Costa Rican laborer (see Thomas Sowell’s latest article). They are so willing to work for so little money because of their alternatives.

Move to the hypothetical; that the Cambodian economy is allowed to grow as a free market and those factory workers will soon have more alternatives. Keeping the factory wages where they are currently at will only attract and retain the least productive workers. Quality employees will naturally migrate to higher wages and take their productivity with them.

Keeping in mind that equilibrium does not spontaneously occur. There’s more to it than that but I’m trying to put it in a nutshell.

>>Essentially, higher productivity requires more training per worker and more productive machinery

Maybe this is just US Manufacturer propaganda, but I have heard stories of Chinese manufacturers buying the latest machine tools with their trade dollars. These tools are so sophisticated that it DOESN’T take a lot of training to use them.

So, essentially, you have peasants right off the farm using the most advanced, most productive tools on earth! The supply of peasants ensures that wages don’t rise. The sophistication of the tools ensures that productivity is maintained no matter who is using it.

Wages do not rise.

Of course, that doesn’t mean that companies make obscene profits. China is a very competitive market, and all that is happening is that prices keep falling. Maybe, to an economist, this is the equivalent of rising wages.

>>the expensive machine should be rejected in favor of labor

Not if you have a lot of trade dollars that you need to do something with. It is quite sensible to take your trade dollars and buy dollar denominated equipment with it, especially when you are in a brutally competitive market, like China is.

Boonton, go the the library and check out page A2 of today’s WSJ. Chinese joint venture automakers are just as capital intensive as their American and European partners. The article says that one reason is that Chinese consumers are sophisticated enough to want the latest automobile models from around the world, and you can only make these models with the latest tools. The Chinese government has limited the entry of new businesses into the auto market to ensure that there is enough profits to justify the capital.

I personally think the article is a little behind the times. I don’t think the Chinese auto market is as limited entry as it used to be even last year.

Just because the supply of labor is large doesn’t mean that factory workers are making peasant wages. It may just mean that their wages aren’t rising, as economists say they should be.

But if your ‘story’ is correct; that there is a huge supply of unskilled peasants who could be plucked from the farm and put behind idiot-proof machines then there should be no middle class. Why would anyone make higher wages if skilled labor was not needed? The Indian programmers are clearly much more skilled than most other Indians. If you put up a sign in India saying ‘laborers wanted’ you’d have lots of applicants, if you added a ‘*must be good in Java, C++ & Visual Basic’ your labor supply would be much more limited.

Preface: Eric claims:

The Chinese and the Indians have to do something with all those trade dollars that they are earning

Yes they do.

Eric says:

1) They can recycle them into T-Bills, thereby lowering US interest rates and funding our budget deficits cheaply, and making the US more competitive through low taxes and cheap capital.

First, exploding budget deficits will make them more cautious, not more eager to place these funds in T’s. Additionally these funds aren’t necessarily in US denominations. Further, insofar that they dump the dollar and question our balance of accounts—mixed with their willingness to invest in the US— interest rates will be on the rise. How long will the Bank of Japan keep propping up the greenback, until they finally lose confidence? Surely a low dollar will make US exports more competitive; however, since the US is the world largest consumer of imports, a weak dollar will hurt more than benefit the US economy overall.

Eric goes on:

2) They can just sell back the trade dollars, which lowers the dollar versus their currency, making the US more competitive.

This is simply a fallacy of composition. Indeed, certain sectors of the US economy will become slightly more competitive. But a low dollar will hurt importers; scare international and institutional investors; and, in the long run, stunt US economy growth.

Eric says:
3)They can buy US assets, investing in the US economy, which makes us more competitive.

A seemingly good point, although there are a number of historical analogies that would suggest otherwise. Pre-1987 market crash, Japan was buying US assets and an assload of US real estate with abandon. We all know how that turned out.

Eric:

4) They can buy US goods and services.

They will. And let’s hope they continue doing so, because we don’t subsidize areas of our market for nothing.

Again, this is all assuming they decide to hold on to the Greenback. The Euro looks appealing, and what about that Canadian Dollar, eh? Let’s hope the Bank of Japan doesn’t lose its taste for the Greenback. The world is depending on the US Economy.

Are you the Lawrance George Lux of Inflation: Roots of Evil? And if so, can I get a free copy of your next book?

Team Canada makes a number of outstanding points – well done!

Some obvious points are being ignored here: the offshoring of US jobs has been growing apace for over 30 years, while the last 4 years have shown exponential growth (remember, we only know about those companies which have either publicized their offshoring or an employee has leaked info).

When the US has offshored almost 1/3 of its economy – catastrophic economic results occur. The US economy is highly interrelated – as real estate associations and small manufacturing associations have finally realized (they’ve been recently questioning all this ITAA pap about why offshoring is so great when the vacancy rates have skyrocketed and the small mfr.’s main customers have been offshored, etc.).

When someone mentioned China buying US goods and services, be advised: they may buy one or two printing presses just so they can make copies of them over in the PRC and then wipe out the US (or other countries’) printing/publishing industries – as an example of their prior recent history.

Also, the companies offshoring are fundamentally deconstructing the US economy – while they further employ foreigners to the detriment of the American worker (or European or Japanese worker). These companies move their operations to China, the Chinese workforce copies their tech and processes, then government-supported Chinese companies arise to compete against those foreign corporations while not allowing them entrance into the Chinese market (I wish we had similar practices here!!!). Cases in point: Stanley Tools and Volvo – who, having laid off their prime demographic purchasing groups to offshore those jobs – are unable to sell to their principal markets – namely the US and Scandinavia as those consumers are no longer employed workers and no longer can afford their products.

Please keep in mind that the number one export of America today is financial paper (i.e., the deficit) and the number two export is American jobs (short-term trade of jobs for capital – destined to lead to further economic meltdown…)

If the fewmets don’t hit the fan in 2005, I’ll be very surprised. Also, please always verify those numbers put out by “objective” organizations – most of them are wrong – even by US government sites.

TC, in the mid 1970’s, the Loonie was worth MORE than the US dollar. And less the two years ago, the Loonie was like 69 US cents.

So what if you’re up 20% this year. Have you ever heard of a dead cat bounce?

It makes little difference to me if the Loonie is 69 cents or 76 cents. PP is still the best, and the exchange rate doesn’t effect my tendency towards a lap dance or not!

What I have noticed with my Canadian subcontractors is that they don’t have the latest equipment. The can compete on price because of the cheap Loonie, but can’t afford the latest US or Euro machine tools.

In that respect, cheapening your currency can be a double edged sword. Productivity will suffer.

>>I’ll concede the productivity point, for the simple fact that our market penetration (in the US) and favorable currency make that point less persuasive.

TC, I think that you are making a mistake that many pro-devaluation people make.

What is the point of a cheap currency, or a high market penetration, if it doesn’t lead to higher living standards?

The key to higher living standards is higher productivity. Every real economist on this web site will tell you that. So, to the extent that the heavily devalued Loonie led to lower Candaian productivity, it led to lower Canadian living standards.

I know a lot of people in Buffalo who will be very happy if the Loonie hits 85 cents. I was living there in the early 90’s when the Loonie was stronger, and the Galleria was filled with Ontarians. It was a good time for retailers there, and they will be happy to get the Ontarians back.

TC, how about a link?

Look, I am not saying that the US is perfect. In contrast to Norway, the US is a multicultural society. To me, you can’t even compare the two.

Canada is a better comparison, because Canada IS a multicultural society. The Quebecois and the 15% or so non-nativeborn population ensures that.

I think that the bottom line is probably that the UN is biased towards things like socialized medicine and away from things like productivity. I would have to look at what they were actually measuring to comment.

And I probably would question some of those statistics anyway. Canada is supposed to have very low crime, but the only two occasions that I have ever seen people assaulted on the street in broad daylight has been in Toronto. Guys just got out of their cars and started beating the crap out of the drivers in front of them. I would chalk up one incident as just random, but to have to occur twice (when I don’t even go to Toronto all that often!) seems to me to be a worrisome trend.

I would chalk the assaults up to gun control. In many areas of the US, if you tried to do that to your fellow motorist, you would most likely end up shot. Don’t try that in Texas, for example!

>>because they generally skew in favour of socially progressive countries–hardly a bad thing.

It all depends on where you are coming from. If you are a 50 something factory worker, or even better, government worker, yeah, it’s a good thing.

If you are a recent college grad looking for your first job, well, it’s tough out there. Youth unemployment in some of those “socially progressive” countries is like 25%. That’s frightening.

As nice as Canada is (and I genuinely enjoy myself when I visit), best country on earth or not, you have more emigrants to the US than immigrants from here. That has to mean something.

>>This Human Development Report is first and foremost about the idea that politics is as important to successful development as economics. Sustained poverty reduction requires equitable growth-but it also requires that poor people have political power. And the best way to achieve that in a manner consistent with human development objectives is by building strong and deep forms of democratic governance at all levels of society.

That’s is the first paragraph of the report to which you linked, TC.

Now, come on. You’re just trolling with that link! That’s like me linking to something by Ann Coulter!

Sorry, eh?

I couldn’t get past the first paragraph, like I said. Look, I’m being honest. The report seemed to me, from the get go, to be political. I didn’t agree with that politics (I roll my eyes at the term “alternate economics”), and it WOULD be a waste of time to try to refute it.

I agree with you! By “progressive” standards, Canada is the best place in the world to live. I just don’t agree that for normal people it is the best place in the world to live.

For example, I find it quite frightening that the top marginal income tax rate in Ontario is like 45% or so, and kicks in at $75,000 CDN. What’s the sales tax at in Ontario when you add PST and GST? 10%? I know it dropped recently, but that is still very high.

Anyway, check out this executive summary. In particular, see how Canadian income is over 10% less than US income, and not suprisingly, so is productivity. Also see the discussion about how the Canadian government is trying to raise productivity. No discussion of exchange rates!

http://www.oecd.org/dataoecd/2/44/9226246.pdf

I like the OECD. It’s an excellent website.

Anyway, I think that report understates the gap between Canadian and US wages. GDP per capita in the US is like $36K USD or so, and from what I have read elsewhere, it was like $23K USD in Canada in 2002. It is probably a lot better now that the Loonie is stronger, but the gap is still there, a gap that is due to lower productivity.

Again, productivity is key. You scoffed when I said that any real economist would agree, but don’t take my word for it. E-mail Arnold Kling (a real economist) and ask him. Also, look at the OECD report again, and look how closely income correlates with productivity. For example, somehow the Norwegians have higher incomes than Americans. But look across the graph and you will see that the Norwegians are also more producitve than the US.

Good points Eric. But….

The people in the in Denmark, Austria, Japan, and France have a lower GDP per capita compared with the US, but somehow seem to be more productive than the US. Further, while where not as productive as these countries, our GDP per capita is relatively higher. This obviously has a lot to do with redistributive entitlement programs in those countries, and the tax regime. This is where our speculative differences arise: The only way to increase our productivity is to decrease our obligation to government entitlement programs(As the OECD suggests). We don’t necessarily want to do that, to the extent that the US has.

The paradox of Norway having a marginally higher GDP per capita to the US, when its higher productivity, in contrast to the US, would suggest it have a much higher per capita GDP than the US, has to do with the incredible social entitlement programs in Norway. Therefore, apart from this being an aesthetic difference, it’s a cultural difference. These countries, Canada included, provide a social safety net that the US doesn’t have the political will to implement.

Standard of living is, admittedly, an amorphously relative term. But you seem to agree with me that Norway is a good standard: high productivity and marginally high GDP per capita, compared to the US. The UN and OECD both recognize this as well. Norway has a far more extensive entitlement programs as opposed to the US. I’ll keep my low productivity any day, if it means a good social safety net and a better standard of living. Productivity, again, isn’t as persuasive as you claim. Thus, our speculative disagreement revolves around how we think economies should be structured. I’m for the socially mixed-economy. How about you?

Thus, our speculative disagreement revolves around how we think economies should be structured

We’re left with an irresolvable speculative disagreement; end of story.

I’d like to continue this interesting exchange, but we’re just repeating ourselves. I’ve got some midterms to write, so I have to get studying.

Therefore, apart from this being an aesthetic difference, it’s a cultural difference. These countries, Canada included, provide a social safety net that the US doesn’t have the political will to implement.

>>I’ve got some midterms to write, so I have to get studying.

What major? What school?

If you don’t mind my asking. Just curious.

I think the goal posts will move before we get to that point. Programming has been all about reducing the amount of effort that it takes to make new code. Developers are attempting to avoid remaking code by moving towards a time when we no longer code but use an application framework to write new applications for us.

An analyst to build a new application in such a framework will have to have in company and therefore in-country expertise. You will not be able to outsource the that expertise.

As an Indian, I am experiencing a transitional change in my city and in my country. New shopping malls are coming up everyday. Spending power increased signifacantly. People even in smaller towns are burning money on branded goods and services. Our roads,railways, telephones, airports becoming better. Our economy is becoming more competitive and open. Our companies are turning into MNCs and joining Fortune 500 companies club. We are regaining our confindence
and creativity which we have lost after 400 years of foreign rule.
India will move up the value chain in the software industry and become a popular destination for software creation just like how Japan became destination for cars, etc.
Even though our wages are low by western standards, our purchasing power is high in our country and hence good standard of living can be expected. We can get a decent and complete lunch for as little as $1. Our education costs are dead cheap but of good quality. Putting aside economics and dollor rupee conversion, we live a happy and satisfied lives with wages we earn.
We were creative before British rule,
but lost the track due to lack of opportunity. Now free and independent India is back into action to face the new world.We have one billion brains to think. 20% of silicon valley startups belong to Indians.
It is very interesting for economists and business men to watch at the progress of India and China in particular and Asia in general.