Earlier this week, Andrew Valentine of Verizon, one of America’s largest telecom enterprises, wrote an insanely amusing blog post recounting how a U.S.-based software developer in his mid-40s (“Bob”) had outsourced his work to a Chinese consulting firm based in Shenyang at a cost of $50,000 per year, less than a fifth of his salary. One of the more striking aspects of Valentine’s account is that Bob had received stellar performance evaluations from his supervisors, which is to say that his company was quite happy to pay him five times as much as his Chinese counterpart.
Valentine’s blog post has resonated mostly because readers have been both delighted and appalled by Bob’s cleverness. Yet one wonders about Bob’s Chinese counterpart, toiling away in Shenyang. What kind of good might this very able Chinese software developer — let’s call him “Li” — do in the United States? Bob’s story reminds us that the wage gap between U.S.-based software developers and software developers based in the developing world is substantial. Some have thus concluded that Bob’s employers were saps, as they could have saved a great deal of money by going the outsourcing route themselves. The more complicated truth is that U.S.-based companies really do benefit from having skilled workers on-site, Bob’s chicanery notwithstanding. If they didn’t, one assumes that enthusiastic outsourcers would have long since driven companies like Bob’s out of business. And Matt Yglesias has drawn on Michael Clemens’ latest work to show that the same Indian software developer will be substantially more productive if she is based in the U.S. than if she remains in India. Highly-productive workers become more productive when they’re surrounded by other highly-productive workers, as Michael Kremer argued in his celebrated article on “The O-Ring Theory of Economic Development.” Another way of putting this is that if we’re impressed with what Li can do in Shenyang, we’d be really, really impressed with what he could do in San Francisco or Austin.
Meanwhile, Bob could engage in geographical arbitrage of his own: if he wants to spend his days reading Reddit and watching cat videos, he’d do well to move to a low-cost jurisdiction or country, where he could live a life of leisure for much less than it would cost him in a highly productive U.S. city.