Posted by: William W. (Woody) WilliamsWorkers in the US loudly lament the low cost of offshoring technology with much wailing and gnashing of teeth. Software development and related costs are the ones we hear most often (because that's our business) but there are other areas as well. It's disturbing. That teeth gnashing sound in particular.
Gnashers claim offshoring is lowering US wages and causing highly educated people great financial difficulty even to the point of loosing the ability to adequately support their families. Other doom-and-gloomsters make a slightly different point: That wages are being "globalized." They mean some kind of world-wide equalization of pay is occurring. The standard of living for everyone in the US is, according to the doomsters, moving smartly along in the proverbial hand basket on its way to mud hovels and pointy sticks.
We've all heard this before, albeit for different reasons at different times. There's always a "great menace" growing out there in the dark just waiting to overwhelm us while taking out the trash.
Despite copious quoting of statistics and vehement rhetoric from the gnashers, they substantially miss the point. Perhaps they should give up gnashing in favor of a more wholesome, comprehensive approach. That's not happening yet but perhaps we can help point out the obvious.
The "problem" isn't wages. Wages are symptomatic but not the problem. A guy who just had an on-the-job accident at a construction site with a piece of pipe embedded in his forehead isn't given a couple of aspirin and told to "get over it" because he's complaining of headache. Symptoms are recognized, aggregated, analyzed, and integrated to arrive at a comprehensive diagnosis. At least that's how intelligent people do it.
Where does thinking like this come from?
From the same place and people who brought us this classic: Since wheat costs six dollar a bushel (or whatever it is), bread should cost about three cents a loaf. Or conversely, since bread cost three dollars a loaf (or whatever it is) and the farmer gets three cents for the wheat in a loaf, the farmer should get more for their wheat... or bread should only cost three cents a loaf depending on who is doing the gnashing. We've all heard that or something similar and offshore wage gnashing is based on similar logic... or, lack thereof.
Businesses that manufacture and sell cars pay for a lot more than steel. Ditto breadmakers and their wheat. We won't go cruising through Excel spreadsheets, overhead costs, or operating expense reports here but, suffice to say, steel and wheat are only part of the story. Everyone can easily understand and appreciate that fact but that's just where the gnashers get it wrong. They select specific bits and pieces of a story and ignore the rest -- especially ignore anything that might cast doubt on their preordained conclusion.
Gnashers already have an opinion (always a negative one) and are only going to tell us things that back their negativity even if they have to make it up as they go. Kind of a reverse play on the scientific method.
That's how intelligent people develop theories; the scientific method.
The complete structure of how and why wages are what they are over the entire planet, solar system, and known universe is not quite in scope for this blog entry. We can, however, broaden our horizons greatly and take on some of the most important, overlooked aspects of wages. We are heading into a space beyond gnashing.
In any particular place and time, there is a cost associated with becoming qualifed by education to take on a specific job. Let's leave aside the question of whether or not we are capable of or have the potential, assume we do, and look at our cost.
Our "qualification cost" could be the cost associated with apprenticeship programs or indentured labor or working with the old man in the family business as a cobbler starting out with sweeping floors. Apprenticeship and internships are still currently viable -- indentured servants in the US disappeared a few centuries back. Currently, for the majority of us, the cost of becoming qualified for a particular job involves educational expenses at a college or university: Tuition, fees, books, and living expenses.
Suppose after some research we determined that earning the average annual starting salary for our chosen job over a five year period allows us to live comfortably within our means and pay back our total cost of education including any loans.
Is that a good deal?
Sure it is. We'd do it. A lot of people have... sometimes flooding a particular market with new candidates.
Suppose after similar research we found that, for a different occupation, it takes 20 years or more to break even on our education cost.
Is that a good deal?
Not so much.
Suppose we found out that earning at the top of our profession, we could never recoup what we paid for the degree.
Bummer, huh. Some people would probably still do it but that's another discussion. There are gnashers out there working on this right now.
The lesson here is that there is a very close relationship between education cost and wages, especially from the workers perspective. The math is simple: If if costs us more to get the job than we can make from it, we probably won't go there. That has an effect on wages in the supply and demand world.
There are further complexities to this relationship but this is enough to go on for now. The cost of education is not the only thing affecting wages and compensation.
Apartments in Boston and New York city cost a lot more than apartments almost anywhere in Kansas or Oklahoma -- just an example; no disrespect intended to any city, state, or apartment building.
Lemons are commercially grown in only the southern most parts of the US. Shipping produce long distances has a cost. Lemons probably cost more in Quebec than in San Antonio, TX or San Diego, CA. Again, no disrespect intended.
Some states have income tax; others don't. Hospital district, school, and property taxes vary a great deal from place to place. Homes and property values: Ditto.
It all adds up to COL -- cost of living. Another term for it with a little different twist is "lifestyle" although lifestyle includes more and implies choice, which COL doesn't... Unless we move.
COL has an relationship on several levels with wages and compensation. For one thing a locally owned, small business operating in a very poor nation with a very low COL isn't seeing much in terms of total sales dollars and total profits compared to a similar business in a wealthier nation. The prices for their goods and services are low (definition of low COL). Therefore since their financial resources are less, their wages are as well.
COL may seem like one of those "relative things." However, for any particular person -- a potential employee earning wages, it is a local thing.
The equation here is a simple one and there are some caveats but in most comparisons, a lower COL = lower wages. COL, as a general rule, is directly related to wages and compensation in any specific area. From the standpoint of a potential, qualified employee under most circumstances, we won't take a job unless the odds are pretty good we'll at least cover COL.
The global relationship is more complex but... well, let's press on for now.
The mega equation, in English, now reads: Education Cost and COL affect and/or are related to Wages and Compensation. There are other market forces at work here but education cost and COL are huge drivers.
The other huge driver is the limited ability of any business to pay wages at a particular level and remain competitive. Yes, businesses are constrained... there are hard stop limits and understanding (quantifying) those limits becomes increasingly complex and global when we get away from the locally owned, small business scenario. For the purposes of this discussion, we'll keep it focused on the local level but keep in mind that local examples, with some caveats, scale to the global level. Gnashers pay attention to that last sentence; it's important.
In addition to cost of goods or cost of materials, businesses have fixed expenses, operational expenses, taxes, upgrade and maintenance expenses, and a whole host of other quantifiable cost factors in addition to wages. Despite that fact, wages represent a large portion of any business outlay -- something on the order of 30% but it varies from sector to sector. Human beings count a lot in producing goods and services despite gnashings to the contrary.
Because wages and compensation are such a large part of the overall operating budget, businesses focus on them and focus carefully. Suppose we are selling shoes from a store front in Omaha, Nebraska and paying $30 an hour for staff while the competition in Omaha is paying minimum wage. While that $30/hr might seem like the "dream job" for our new hire, it won't last long. We are doomed because we have to sell our product at no greater than market prices (+/-) and pay the same overhead and expenses as every other shoe store in town as well as compete with internet retailers. So much for that dream job in retail sales.
The lesson at this point is that wages and compensation aren't paid for out of some magic bucket of money -- the money comes from the goods and services we produce. So... the wages we make can't be more than sales can cover. Put another way, total wages and compensation can't be more than the remainder after all other expenses of doing business are subtracted from the gross receipts. This is a hard stop constraint on wages. Yes gnashers, that is a simplistic statement but accept the truth of it and move on.
So if a potential employer is constrained by market conditions to a certain pay range and a qualified, potential candidate demands something in excess of that, they won't get the job. Another piece of simple math to gnash on.
Our new mega equation for wages and compensation for the prospective employee now includes
- Education Cost
- COL affect
- Current business budget
A fellow from India says that the entire cost of his advanced degree (tuition, fees, books, and living expenses) was the equivalent of US $100. Education cost is obviously low in India. So is COL. Those two things, if our equation is working today, should mean wages in India are lower than in the US.
Yep; just checked: They are. Other places as well for roughly similar reasons.
Assuming the fellow from India produces as well as similarly educated workers in the US -- most people agree that is the case but if anyone has heartburn over it just read on anyway -- what does that mean to workers or "the system" in the US?
Well, it doesn't mean that wages are a problem or that wages are being globalized. It means that education in India is largely subsidized, for one thing. It's not the "wages and compensation" part of the equation that's out of whack, it's the "education cost."
The "hundred dollar guy" from India was talking about costs when he went through college... A while back. Currently, in India, the total cost of a good degree (tuition, fees, books, living expenses -- everything) is about the same as the cost of one year in a local community college for tuition alone. One (1) year; tuition alone. Now that's something to gnash about.
We're not going to fix the disparities between offshore and US sourcing of products, service, or resources by driving US wages up or price fixing. Attempts to do so or impose tariffs, embargoes, or other protectionist firewalls only makes matters worse.
Why?
Because not one of those things will drive the cost of education down in the US and it's the cost of education that's out of kilter. Education costs continue to spiral upward and only exacerbate the problem.
Education costs are not included in COL calculations. COL is based on:
- Housing: Includes purchasing, renting or maintaining a house or an apartment.
- Food: Standard basket of food purchased in the place.
- Utilities: Includes electricity, gas for heating, telephone etc.
- Health: Expenses related with health.
- Transportation: Includes expenses like auto insurance, gas for vehicles, maintenance and repair, transportation etc.
- Miscellaneous: Other costs associated with daily living.
We can substantially reduce the COL without negative impact to our "lifestyle" by reducing the cost of housing and the cost of health care. This isn't about wages, it's about COL. Reducing COL has the effect of giving everyone a big, fat raise. For workers in the US, wages are not the problem, COL and particularly housing and health care costs is.
We can gnash about whether or not businesses should source from the lowest cost suppliers no matter where their location. We can ponder the US corporations moving offshore or loosing markets to foreign competion. We can gnash about whether solutions are best delivered by government programs, market forces, or some combination of both. But before we talk about solutions, we'd better get set on the problem.
Feeling the pinch from falling wages and compensation is a symptom. Offshore enterprises gaining market share in the US is a symptom. US businesses relocating on foreign soil is a symptom. Competitors for jobs in the workplace willing and happy to work for less than half of US wages is a symptom. A couple of aspirin won't do it here, gnashers.
Education costs and COL are problems.
This is a good time to point out that the cost of housing needs to continue going down, not stabilize or go up. That should set the gnashers off for sure.
We're better off focusing the rhetorical, public, and political debate on reducing the cost of education, health care, and housing where solutions will actually do some good.
Gnash it!
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