Remember the good ol' days, when outsourcing was the bane of the US? All the high tech jobs were moving overseas, increasing unemployment of white collar workers and dampening our country's growth prospects. Greg Mankiw even got raked over the coals for saying that trade in jobs is good for the economy.
While those whose jobs were threatened by globalization had reason to worry, the country at large had little reason to worry. But worry they did. What's happened since then? Prices have changed, the most-productive workers have been snapped up, and the flow of jobs has changed according to the Wall Street Journal ($$$) - front page in the July 3rd edition.
The lure back then: low wages of highly-productive workers:
Mr. Shah, who leads a California start-up called Riya Inc., had opened an office in India's technology capital of Bangalore in 2005, hiring about 20 skilled software developers. The lure was the wage l
Two things began to happen. One, the increased demand for Indian workers increased their salaries.
Then Indian salaries soared. Last year, Mr. Shah paid his engineers in India about half of Silicon Valley levels. By early this year, it was 75%. "Taking into account the time difference with India," he says, "we weren't saving any money by being there anymore." In April, Mr. Shah shut down the Bangalore office and offered half of its engineers a chance to move to San Mateo, Calif., with work visas.
The possible effects of increasing wages: substitution effects (using a different type of resource to do the same job) and scale effects (lowering production). The article notes the substitution effect.
Across Silicon Valley, some technology companies, particularly start-up and midsize ones, are beginning to turn away from India for low-cost labor to do sophisticated tech work. Kana Software Inc. of Menlo Park, Calif., eliminated 100 software-development jobs in India in late 2005 and expanded its U.S. hiring instead. Teneros Inc. shut down a 30-member India office and brought 12 of the people to its headquarters in Mountain View, Calif. Some tech start-ups are choosing other low-wage foreign locales, such as Romania and Poland.
The low-hanging fruit principle tells us that rational managers try to produce the easiest units first. To do so, they seek out the most-productive resources first. This principle applies as well:
Several years on, the forces of globalization are starting to even things out between the U.S. and India, in sophisticated technology work. As more U.S. tech companies poured in, they soaked up the pool of high-end engineers qualified to work at global companies, belying the notion of an unlimited supply of top Indian engineering talent. In a 2005 study, McKinsey & Co. estimated that just a quarter of India's computer engineers had the language proficiency, cultural fit and practical skills to work at multinational companies.
The article says that this is a "new twist on the outsourcing debate," but it's not a new twist to economists. In fact, without considering the low-hanging fruit principle, the phenomena can be explained by basic production theory. More on this at a future date.
Comments