Economics of Jobs

Dana Blankenhorn writes:

The growth and vitality of the American economy really comes from a handful of people.

Foremost among them, of course, are the folks who make and design semiconductors. Software and Internet experts also provide real value. Manufacturing, whether of cars or carrot sticks, is production of real value.

Everything else we do is redistributive. Bankers and brokers and insurance agents merely facillitate transactions based on value that exists. If you’re selling, or buying, or serving the public, you’re spending the value that others created. All the money we tax started as value someone created. All the value of our real estate — the land and the buildings — depends on the amount of capital sloshing around our system.

Moore’s Law has dramatically improved our ability to create by increasing productivity. This first happened in factories, but now extends to offices, which can exist anywhere the Internet goes. Even India. Unless wages rise to compensate for Moore’s productivity you have a deflationary spiral.

Dana goes on to write about the McJob:

McDonald’s can McScream all they McWant, their McMarketing matches the McReality. It takes no skill to work at McDonald’s, and the vast majority of workers there don’t make what we used to call a “living wage.” When the company advertises for workers, it even acknowledges this, specifically going after teens, lonely old people, and bored housewives who just want a little extra, rather than what anyone might call talent.

But the point is McDonald’s is not alone in this. All the big restaurant chains, all the amusement parks, all the retailers, they all rely on low-cost, low-value labor. Rather than using technology to free people, they turn their stores into the equivalent of early 20th century factories.

And so we have a race to the bottom, within American society, as well as throughout the world. We create jobs that anyone can do, so we’ll take anyone to do them.

Atanu wrote a few days ago on outsourcing and comparative advantage:

A couple of UC Berkeley economists, Ashok Bardhan and Cynthia Kroll, estimate that 14 million white-collar jobs are at risk of being outsourced, or about 11 percent of the total, by 2015.

I find nothing surprising about that. Consider the structural transformation of any economy. First, you have 100% of the labor in agriculture and you have a subsistence economy. Somehow agricultural productivity increases. Labor gets released from agriculture and moves to manufacturing. With time, the share of labor in agriculture declines, and share of labor in manufacturing increases. With manufacturing producitivity increase, that sector also releases labor so that the services sector grows in the labor share. Finally, agriculture and manufacturing share of labor reach very low numbers and the rest of the labor force is in the services sector.

The US had 40% of its labor in agriculture in 1900. A hundred years later, that number is only 2%. With time manufacturing will also shrink to about 5% of labor. Then the US economy will have 90% of its labor in services.

In a world where trade is possible, the old story of comparative advantage continues to hold. So tradeable services — such as BPO, programming, research, etc — will migrate to countries which have a comparative advantage in providing them.

The US does not have a comparative advantage in those services which are tradeable; India has. The good news is that India has a comparative advantage in those BPO and programming services; the bad news is that India does not have an absolute advantage in those services. We have a comparative advantage only because the average productivity of India is so abyssmally low. Low average productivity translates into low average wages. So programming wages and other wages are low in India. Therefore, if on average the productivity of Indian programmers is somewhat comparable to the productivity of US programmers, then India can potentially enjoy a comparative advantage in programming (and it does.)

Published by

Rajesh Jain

An Entrepreneur based in Mumbai, India.