Job Outsourcing and Efficiency Wages

It seems to be generally assumed that whenever someone's job can possibly be performed by someone overseas at a much lower wage, or at a lower cost, it soon will be.

There are many reasons that may make this more or less likely in particular cases, but here I'll just suggest one that seems to me to bring significant doubt on the assumption.

If employers were constantly on the outlook for opportunities to export your job overseas to obtain a lower wage rate, it seems to me only logical that employers would have been doing their domestic hiring by choosing the qualified workers willing to work for the lowest wage.

This seems so logical in fact that a whole subset of labor economics was created to try to explain why this doesn't seem to be the case. This subset is called 'efficiency wages' and tries to understand why employers often pay wages far above the level required to hire qualified workers. Since workers are far from homogeneous, this is a hard condition to validate. However, after controlling for all sorts of variables, including education level, for example, economists are convinced that workers are often hired at wage levels that are far above the minimum levels required. This subset has produced a wide range of possible explanations, often related to the difficulty of observing and controlling worker effort, but I find most of these to be unconvincing, although I don't claim to have any particular expertise in this area.

One of the results from the empirical studies of the problem is that employers typically interview up to nine applicants for every job filled. This is a lot of time and expense to simply find the lowest cost qualified candidate. Of course anyone who has been on either side of an employment interview realizes that it is not lowest cost that is being pursued, but rather the interviewer is ranking the candidates in an order of preference that may be largely subjective, and hoping to be able to hire the highest ranked candidate. It is this desire to hire the highest ranked candidate that results in bidding up wage rates often far above what is needed to hire a candidate qualified for the current opening.

A profitable, ongoing company is likely to benefit from this process as it collects a pool of superior (not necessarily in the sense of performance in the current job) workers that will provide many benefits in the future such as an experienced, verified source of higher level workers and supervisors. The pay check amounts for these workers cannot be understood as a mere payment for current work, but must be considered as taking part of profits and investing them in the future of the company. Note that since this looks like compensation, it is effectively a tax advantaged investment.

This investment in the form of premium wages is not possible for a company which is not significantly profitable. Thus it is the marginal companies that can only survive by first hiring only low cost domestic workers and then desperately looking overseas. If a profitable company hires overseas, it largely gives up the opportunity to invest in a superior workforce subjectively evaluated by its own human resources personnel, and loses any such existing investment.

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Don, A couple of points I


A couple of points I gleaned from your essay -

1) Your claim is that wages are determined in part by futuer expectations of performance, including the possibility for future promotion within the company into management and supervisory roles. Where does labor productivity figure into this, if at all?

2) That going overseas for workers is somewhat an act of desperation, which benefits US workers by keeping the companies financially viable. I think this is the least stressed point in the whole debate that has been going on - that without overseas outsourcing, companies could not survive.

Jonathan, In a modern,


In a modern, complex economy, productivity has more to do with the characteristics of individual firms than with individual workers. In order to pay premium wages (invest in the future human capital of the company) the overall productivity must be sufficient to earn a profit while producing products and services that consumers want at a price that they are willing to pay.

Regards, Don

Once again gentlemen, you

Once again gentlemen, you have reduced the equations to only the short sighted ; ?improved financials?. Certainly corporate rewards are the benefit.

Lets really look at the numbers. Soon to be released study says 400K high skill jobs have moved overseas in the last 4 years.

Many of us were converted to contractors prior to the loss of our jobs. We do not show up in the claims data.

I went from wonderful reviews and 150K base a year to 10 bucks an hour. I sold over six million in products in services in 4 months.

Craig Barrett, CEO of Intel stated it this way:
In Mr. Barrett's view, "Unless you are a plumber, or perhaps a newspaper reporter, or one of these jobs which is geographically situated, you can be anywhere in the world and do just about any job."

You want a national security issue? Trust me, this threat to the long-term U.S. economy is a big one. Why it's not a thunderous issue in the presidential campaign is beyond me.

Intel has its headquarters in Silicon Valley. A Mercury News interviewer asked Mr. Barrett what the Valley will look like in three years.

Mr. Barrett said the prospects for job growth were not good. "Companies can still form in Silicon Valley and be competitive around the world," he said. "It's just that they are not going to create jobs in Silicon Valley."

The University of Georgia is now assessing if they will continue any engineering programs because the future for these position is limited at best.

If your training should have taught you anything, the first lesion should have been ?just cause you do not see it, does not mean its not there. You economist only study the wreck after it happens. Hell it takes you guys 20 years to determine if a wreck happened at all.

The questions you folks never ask are:

Just because you can, does it mean you should?

When you tax base is gone, who will pay to protect you or not protect you.

When the GI?s come home and find the limited opportunities, what will be their response (Oklahoma). What are the related societal costs in dollars and souls?

I lived through the 70?s and 80?s in the north when all the auto plants were closing. These communities truly never recovered. Look at all the small ghost towns in the west. These are not happy people, they are armed and at some point enough will be enough.

What are the downstream costs: The data should be available.