TIME magazine's cover article "Is America flunking science?"

sakky
Mon, 13 Feb 2006 21:00:28 +0000

well they dont have a reason to increase the pay…coz for the simple reason that they are getting their work done for half the cost in asian countries…Also the quality of an average indian tech graduate is bound to be more even without a masters degree because of the curriculum followed so the companies are in a win win situation





Sakky, you have a point–in China and India starting engineering positions have salaries of about 4-6X that of a typical non-technical job–thus incentivizing these careers. The same incentive is not offered in the US, since–as vampiro explained–would be impractical for employers. Why would an employer want to pay around $100K for a US employee, when he could get simillar work from an IIT graduate and pay him the equivalent of $5-7K?

Thus, if we were in a closed-market economy and the US companies couldn’t rely on the cheaper third-world countries for labor, your theories would hold.



Aha, very good, I see that you have gotten to step 1 of your thinking. But you haven’t gotten to step 2 - which is quite simply that why don’t all of those non-technical jobs in the US also get shipped overseas?

Let me give you an example. Just like you say ask why should companies hire US engineers for 100k when they can get a guy from INdia for 4k, I could just as easiliy ask why does Goldman Sachs hire all of these high-priced Americans right out of undergrad to be investment bankers, and pay them over 120k a year (including year-end bonus)? Why do investment banks pay 7, 8, or even 9 figure compensation packages to their best investment bankers? Why not replace each and every single one of them with a bunch of Indians? Indians are smart, they can do financial calculations, they’re hard working, so why doesn’t all of Wall Street simply fire all of their bankers and outsource it all?

By the same token, why does McKinsey hire all of these high-pay consultants from the US, instead of hiring just a bunch of very cheap guys from India?

The point is, I made the comparison between the 50k engineer in the US vs. the 30k non-engineering in the US and showed how that provided few incentives for Americans to study engineering. You guys remarked that outsourcing removes the need for companies to raise engineering pay above 50k, and that’s true. On the other hand, you haven’t answered why companies don’t just also use outsourcing to whack all of those non-engineering jobs.

What I am mystified about most of all is that these American tech companies will say that they are unable to boost American engineering pay. Then these same tech companies will pay McKinsey tens of millions of dollars for a consulting engagement. And who does McKinsey bring in to complete that engagement? Often times, it is those SAME engineers who that tech company refused to boost pay for. In other words, a top engineer from MIT may find that he will get a higher paying offer from McKinsey than from a tech company, and so he will choose to work for McKinsey, and end up doing consulting for the same tech company who refused to pay him what he wanted. So the tech company ends up paying him anyway, just indirectly as opposed to directly. Wouldn’t it have been more efficient for that company to have hired that guy directly to be an ‘internal consultant’, as opposed to ending up (indirectly) paying guy anyway, but also having to pay a premium to McKinsey?

And in fact, this whole subject gets into an interesting aspect of labor economics. zking786, you talked about closed-market economies. Well, the fact is, labor markets are far from efficient markets. Almost never do prices and quantities equilibrate at market-clearing points, which is the heart of classical free-market economics.

Let me give you an example. Take investment banking. Investment banking (IB) pays very well. And it is also extremely hard to get into IB, because far more people want to get in than there are jobs available. That’s a DIRECT violation of free market economics. After all, according to classical free markets, whenever the supply of labor exceeds demand for labor, wages should drop. Since more people want to get into IB than there are spots, that should mean that banks could just create many more spots, at far lower salaries, until such time as there was no excess. In other words, there should be nobody who complains that he wants an IB job, but couldn’t get one. If the free market was allowed to equililbrate naturally, then everybody who wants an IB job will get one. They may not get IB jobs that pay well, but everybody who wants one will have one, and nobody would ever have to complain about not having one.

As it turns out, this is clearly not the case. Plenty of people who want an IB job don’t get one. And there is no “bargaining” allowed. For example, you can’t just go to Goldman Sachs and offer to work for half salary. Goldman Sachs has a certain pay package and everybody gets the same package, and most people who try to get into GS do not get in. In fact, I know one guy who was so desperate to get his foot in the door into IB that he was willing to do an unpaid internship with them. Yeah, UNPAID. Yet nobody took him up on the offer.

Goldman Sachs could easily say that they are going to hire twice as many investment bankers by just cutting their pay in half. But they don’t do that. Why? Because of the labor economic theories as discussed by Nobel Prize Winner Michael Spence. Basically, by offering extremely high pay packages, the IB’s can ensure that they get lots of and lots of candidates and thus can pick the very best ones to hire. Furthermore, that high pay makes the ‘pain’ of doing a poor job and thus getting released extremely painful. Somebody who gets into GS may be thinking (justifiably) that the money he is making there is far more than he could make doing something else, so he better do a very good job in order to avoid getting laid off. Whereas, a regular engineer making only 50k may not care very much, figuring that if he does lose his job, he can just get another engineering job that will also pay him 50k, so he isn’t exactly heavily incented to work very hard.

However, to summarize, I think what is really going on is a strange artifact in the way that engineers in the US are paid. Why is it that these companies are not willing to pay top dollar for engineers, but are willing to splurge for consulting services and financial services? If the companies wanted to save money, wouldn’t they be interested in saving money EVERYWHERE? If these companies wanted to outsource to take advantage of labor arbitrage, then why hasn’t an outsourced management consulting or an outsourced investment banking industry been created?