Comparative disadvantage

June 7, 2007

Is outsourcing bad for the American economy?  A few years ago, Sen. Schumer and Paul Craig Roberts wrote some op-eds arguing that America has much to lose from outsourcing. If there exists an endless supply of cheap labor in foreign countries, then surely everything will be outsourced and Americans will work as Walmart greeters. Economists replied that the theory of comparative advantage, which says that two regions can specialize in their area of expertise thus creating more goods at lower overall costs, will save the day. They say that something, though we don’t yet know what, will replace those lost jobs. Recently, Alan Blinder – a big shot economist – had a change of heart. He argues that the upheaval caused by outsourcing requires big changes in the American economy and educational systems.

I tend to believe that outsourcing is good for the global economy, but bad for America. You can see the effects of comparative advantage within America by browsing any history book. Industries move from one region to another (textiles from New England to the South). Industries come and go (horse carriages to cars). Nevertheless, the overall American economy grew wealthier because of this. But all the dislocation happened within the US, and labor is more willing to move around to find new jobs. And some regions really have suffered economically when they lost their advantage and found nothing comparable with which to replace it. If we expand this to the global economy, the same thing that happened to New England textile towns could happen to the US. There will be jobs here, but they may be lower quality jobs than before. I believe (but don’t feel like looking it up) that this has happened already when many manufacturing jobs were replaced by lower paid service jobs.

I don’t believe software will suffer the same fate as manufacturing. Certainly software development and IT work is more mobile than manufacturing, but there are many other forces at work. First, there are a limited number of capable programmers around the world. Don’t believe the numbers you hear of trillions of Indian and Chinese programmers out for your jobs. Most of them went to technical trade schools and got a miserably bad education. Wages in India (probably China, too) are soaring, which implies there aren’t enough programmers to satisfy demand. Second, new languages and tools (Visual Studio, Eclipse, etc) will eliminate far more low-level programmers jobs than outsourcing. Third, customizing packaged software will still need to be done locally. Fourth, software is usually such a high margin business that it is more important to hire a few excellent programmers than an army of cheap drones. So I don’t think outsourcing alone will have a substantial impact on high-end programming jobs.

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One Response to “Comparative disadvantage”

  1. chris sivori Says:

    So you hope…

    Education can be improved dramatically in a few years. Also, I think there is an opportunity for higher level programmers to manage larger teams of lower skilled programmers.


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