Tuesday, January 01, 2008

Do U.S. Companies Overlook Labor Arbitrage Here?

Fact 1: The size of the global outsourcing market is estimated to be $310 billion in 2008, driven primarily by the endless pursuit of U.S. MNCs looking for low-cost labor any where in the world it is available and ultimately seeking greater corporate profits. Most offshore outsourcing efforts save 15-20% when all costs are considered, representing a form of "labor arbitrage" generated by the wage gap between industrialized and developing nations.

Fact 2: According to the National Organization for Women, full-time women workers in the U.S. are paid an average of 77 cents for every dollar men are paid. Women of color are short-changed even more, with African-American women paid only 71 cents and Latinas just 58 cents on men's dollar. These wage gaps stubbornly remain despite the passage of the Equal Pay Act more than 40 years ago, and a variety of legislation prohibiting employment discrimination.

Questions: If the wage gap in the U.S. exists primarily because of discrimination and U.S. companies could immediately save 23-42% by exclusively hiring women, why would they overlook this "labor arbitrage" opportunity and profitable wage gap right in their own back yard? In other words, why would U.S. companies go to the other side of the planet to hire low-cost workers in Bangalore, to take advantage of a 15-20% wage gap and exploit labor arbitrage in India, when they could exploit labor arbitrage and a wage gap right here in the U.S.?


At 1/01/2008 11:32 PM, Blogger holeydonut said...

I though you referenced an article a while back indicating that women who did the same job as men actually tend to get paid more?

I think the gender-gap cited in this post today refers to an average person regardless of their job. And I think it's safe to say (hopefully) that men and women perform different jobs, which would affect the average income since the different jobs tend to have different pay structures.

But if you intentionally paid women less than men for the same job - I'm sure you'd end up with a lawsuit.

At 1/02/2008 1:52 AM, Blogger Bruce G Charlton said...

Why Men Earn More by Warren Farrell is very good on this.

In a nutshell, the men women difference in wages disappears if you control for significant confounders (hours worked, qualifications, propensity to travel, anti-social hours and conditions etc).

Of course, men and women are on average different - psychologically and physically - so differences in average outcomes are to be expected in most areas of behaviour.

But if these differences (such as temperament and motivation) are controlled-for - so as to compare like with like - then the outcome differences will also disappear. (To be more exact, outcome differences will disappear in modernizing, capitalist, democratic societies, at any rate).

The frequent media claims of sexism-driven sex differences in salary and position in countries like the US and the UK are a result of statistical and scientific non-competence - or dishonesty.

At 1/02/2008 12:12 PM, Anonymous Marko said...

Because any hiring in the U.S. still has the same excess costs built in - regulations, payroll taxes, expensive benefits, potential litigation.

Any hiring in the U.S. is generally "you get what you pay for" because of equal pay laws. So, if you pay less for a worker in the U.S., you generally get less work. Outside the U.S., because the costs I mentioned above are not present, you get more bang for your buck. That's why.

At 1/02/2008 5:06 PM, Anonymous Anonymous said...


A very interesting post. Certain areas of research seem to become very politicized or the data can be manipulated/misrepresented. Look forward to reading more about this subject.

When one encounters such behavior by researchers and professional writers, it is highly unethical but unfortunately, all too common. Few readers check the footnotes or look up the original research studies.

Readers need to be very careful to test the reliability of a source of information just like an accountant tests data when auditing the financial records of a company. Readers tend to take what they read at face value without reviewing study methodology or evaluating propensity for bias with the resultant consequence that readers can be easily misled.

At 1/03/2008 9:44 AM, Anonymous Anonymous said...

Come on. Are you serious? You need to put on your thinking cap before putting up some of these posts.

At 1/04/2008 2:41 PM, Blogger Darryl said...

I think the point subtly being made here is that, if a real and significant pay gap between men and women existed, and a relatively risk-free method of exploiting this labor arbitrage were possible, private firms - always pressed towards greater efficiency - would have organized around this fact and exploited it to gain a greater competitive advantage. Just my $.02


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