Saturday, January 09, 2010

Labor arbitrage

Some interesting numbers from this blog post by a software industry veteran operating in China. As a rule of thumb, it seemed to me that in non-tourist Beijing the buying power of a yuan (1 rmb) was very roughly equivalent to a dollar here: a cheap meal for 5-10 rmb, a supermarket beer for 1 rmb, etc. So, even at the 5 to 1 labor arbitrage rate suggested below a software developer in China has roughly similar buying power in local products as a developer here in the US (current exchange rate is 6-7 rmb per dollar). Of course, that buying power equivalence doesn't apply to "tradeables" like laptops, gasoline, automobiles, etc.

In the National Academies Press 2005 report, Rising Above The Gathering Storm, it was noted that "for the cost of one chemist or engineer in the U.S., a company can hire about five chemists in China or 11 engineers in India." In fact, I have personally observed that the labor arbitrage difference is the largest in an absolute sense the higher a firm opts to go on the value chain. For example, a Ph.D. who is paid $125 per hour in the States (whether fully-burdened or on contract) can be billed at about $25 per hour, whereas a $75 per hour Java programmer (an average Joe Java programmer, not a superstar) can be billed at between $16-18 per hour. And a superstar Java programmer: $100-125 per hour in the States, whereas a Tsinghua equivalent is billable by us at $20-23 per hour. As to the 11-to-1 ratio noted by the COSEPUP report, it's certainly doable (not always, but sometimes) in certain areas such as software testing where talent in Tier 2 cites can be tapped. Advice: Don't go to Beijing, Shanghai or Shenzhen for software testing or localization/globalization. And even though I personally don't like BJ, the best high-end talent is in BJ, not in SH, SZ, DL (Dalian), or anywhere else in the mainland.


minka said...

I thought this part of his article was more interesting, where he talks about how for working Americans, keeping jobs here is the most important priority, but that barely registers in Wash D.C. Add that to the outrage over banker bailouts and you can see why a populist revolt is brewing.

Many results were a bit surprising (well, at least to me). For one thing, "Protecting the jobs of American workers is the top-ranking foreign policy goal, considered very important by more Americans than any other." (Note: There were 14 choices, with two pertaining to terrorism and nuclear weapons; both ranked lower in importance than job protection.) And, "A majority (of Americans) believes outsourcing is mostly bad because of job losses in the United States." "(T)he top-ranking foreign policy goal"? I find this interesting - and odd - since offshoring is a minor blip on Washington's radar. And if you don't believe me, take a look at the tech-related hearings on Capital Hill: Don't see much about offshoring or outsourcing, do you? Some smart Senators and Congressmen may opt to jump on an anti-outsourcing/offshoring bandwagon next year; it might be a wise political decision, even though nobody reading this may think it's desirable (since I'm in the outsourcing/offshoring biz, I hardly believe it's desirable).

Ian Smith said...

"and you can see why a populist revolt is brewing"

no revolution is possible. if you want a vison of the future imagine a boot stomping on a human fcae forever.

the mass media of today is beyond any past totalitarian dictator's wildest dreams.

LondonYoung said...

minka - I offer you my theory that at least one factor propping up American labor's standard of living is sectors of the economy not yet copied by the Chinese, like the banking sector (remember, the US raises a lot of tax revenue, but most of the tax come from just a couple of percent of individuals). So, as the pitchfork wielding masses storm Castle Morgan/Goldman, let's hope that the bankers were just collecting rent rather than being paid a fair wage for an international skill. Otherwise, as Steve has pointed out, ICBC is waiting in the wings. Someone is gonna have to generate the income needed to pay the taxes to pay off the debt Washington is running up.

Maybe we'll generate the money by exporting automobiles.

Ian Smith said...


1. thinks generating income and producing wealth are the same thing.

2. has confused a fair wage with the productivity of the labor.

3. has confused economic rent with a wage higher than the value of the labor.

minka said...

LondonYoung you don't get my drift at all. If working stiffs are going to be broke either way, then break globalization NOW. Tariffs, for example. Import substitution would be good for a chunk of jobs.

And give the companies who are abandoning their American workforce the boot. Let them go deal with the Chinese or Indian legal system, ha ha. Methinks they'd come shrieking back to papa pretty soon, but who wants them. Go live your precious 'globalization'. See how you luv your 'globalization' without the implicit protection of the US Govt (and abused working stiff American taxpayer). Hahhahaha.

LondonYoung said...

Well, let me try to strip out as many economic and semantic assumptions as I can.
I think the ports of the U.S. fill daily with container ships delivering goods.
I do not think a similarly valuable flow of physical goods moves the other way.
I think the net flow has the effect of raising the U.S. standard of living.
If whatever it is we do to support this flow stops (banking? modelling black holes? innovation?) then, all else equal, the standard of living will fall.
If Americans start to produce these goods for pretty much no cost (say by using our currently unemployed labor) then our standard of living would not fall.
And, because the unemployed would then have jobs, society would feel - and be - more egalitarian.
So, one can consider tariff barriers to stop the labor arbitrage.

But we have all seen this movie before and it does not have a happy ending.

Raymond said...
This comment has been removed by the author.
Ian Smith said...

Both sides of this non-debate are BS.

1. If your job is as well done by a Chinese, and he costs 1/5 as much, you should find something else.

2. If your job can't be done by a Chinese or an Indian, it may still be that you produce nothing.

3. If you are an executive at an American company with all of its manufacturing done in China your income will be higher than it should be.

Ian Smith said...

But after all LY is my wonder wall.

Carson C. Chow said...

Are programmers really paid that much? $75 an hour is 150K a year.

Steve Hsu said...

Those are consulting rates, so a bit on the high side, but not crazy numbers.

Put another way, yes, you are ripping off your students and postdocs relative to the market value of their skills. Oh, I forgot, they get the thrill of doing REAL SCIENCE! :-)

Carson C. Chow said...

Obviously, the thrill of science is worth $50/hour to them.

Steve Hsu said...

Or maybe they don't know the differential is $50/hr? You seemed surprised...

Carson C. Chow said...

Not my lab:)

But I do get the sense that the job market for physicists is clearly not efficient.

LondonYoung said...

$100/hr is the min price I've seen for any half decent programmer willing to work in NYC ...

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