What is wrong with labor rate arbitrage?

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r2i4c
Posts: 88
Joined: Sat Jul 14, 2007 7:52 pm

What is wrong with labor rate arbitrage?

Post by r2i4c »

R2Iers,

I am sure that many of you have gone through this after your move to India i.e. cut in wages when you took a transfer on your current US job to India. I am also about to undergo a cut in wages to suit the "Indian labor market rates", now that I am in India. Mind you, that while I have to take a pay cut, I am expected to meet the same goals that my US counterparts are. My job is in engineering-marketing, and what I produce has consumers all over the World, and specifically, in North America and Western Europe.

With that said, I wanted to write about what I think of the situation, now that I have returned to India, and have lived here a couple of months, and have had a chance to think about this whole labor rate arbitraging. Here is how I define labor rate arbitraging. It is hiring of cheap labor elsewhere, although with the same skill set for the job, as required for that job in a given developed nation. It is going on rampantly in the World today. The whole India off-shoring story is based on labor rate arbitrage.

I think labor arbitrage is unfair, unjust, and does not represent true capitalism. For instance, why should an IT professional (you can replace IT here, with anything you like - finance, accounting, medical, etc.) in India be paid one third or one half, or whatever of their counterparts in developed nations? So long as he is as productive as his counterpart elsewhere, he should be paid the same.

A capitalist society offers the same opportunity regardless of geography, on the basis of productivity. It is unfair for a business to assume that a worker in India is less productive than a worker in the US simply because India is a developing country. I see everything wrong with this assumption.

I want to hear what others think of this situation. Please share your views as it will help me learn more about economics of labor.

Regards,
R2I4C.
insane
Posts: 17
Joined: Wed Feb 07, 2007 11:01 am

What is wrong with labor rate arbitrage?

Post by insane »

It is to do with the local cost of living. How much do you spend on rent in India? How much did you spend in US? At the end of the day, most people who R2I feel they can save more and have a better quality of life in India.

That said, the cost difference is what drives businesses. Indian IT salaries at mid-level and senior level are now comparable to that of US. Thats why you see jobs moving to china and elsewhere.
nand
Posts: 447
Joined: Thu Jan 25, 2007 6:38 am

What is wrong with labor rate arbitrage?

Post by nand »

it has to do with free market and supply and demand. nobody is forcing you to work. If you think it is unfair there are plenty others for whom this is more than fair. Ultimately wage rates are determined by the market and the market is fair. If wage lvels are the same in india and us, as a US CEO why will I come to India, it is logistically easier to get the work done in one place itself..
layman
Posts: 3928
Joined: Tue Jan 30, 2007 10:35 am

What is wrong with labor rate arbitrage?

Post by layman »

An ipod shuffle costs $70 while non branded MP3 players cost $20. An iMAC costs $1500 while you can get cheap ones for $400. Why? They both perform the same function. Why Dollar Tree sells stuff for $1 for which one has to pay double that amount outside?

Indian IT service is marketed as a volume play. As a cost saver. There is no company in India that says in its objective that it will deliver more value or ground breaking technologies compared to its US counterparts. They are there to provide a cheap volume play alternative to branded counterparts. The game in India is how to get your work done by a fresher or less experienced person so that they can get rid of you and save cost. The mid and senior executives get paid on par with US counterparts because the value proposition they provide is lower labor cost. They get paid high to reduce the salaries of others. Their whole aim is to find volume play alternatives such as college hires. It is alarming to see the rate at which engineers are produced every year in India.
KRV
Posts: 255
Joined: Tue Jan 16, 2007 10:55 pm

What is wrong with labor rate arbitrage?

Post by KRV »

OP,

Within each country, the immutable law of supply and demand determines what a labor unit is worth. How much is your time worth? It is worth exactly what someone will pay for, no more, no less. Labor arbitrage may be unfair to you because your *identical* labor got arbitraged as a result of your decision to return to India - so understandably, this is personal to you. The cross-world move that you made, while simple to you, is anywhere from difficult to impossible for most of your peer group in both India and U.S. That's why the labor arbitrage continues. The boundaries may be breached by some people like you so you feel the arbitrage, most of the people don't.

Any arbitrage will not sound fair if you are personally affected, but business thrives by capitalizing on any arbitrage opportunity they can get their hands on. This is no different than the material cost arbitrage advantage that resource-rich countries have - supply and demand again. Labor arbitrage is very much a part of capitalism.
csvirus
Posts: 176
Joined: Thu Jun 28, 2007 1:48 pm

What is wrong with labor rate arbitrage?

Post by csvirus »

insane;73277It is to do with the local cost of living. How much do you spend on rent in India? How much did you spend in US? At the end of the day, most people who R2I feel they can save more and have a better quality of life in India.

That said, the cost difference is what drives businesses. Indian IT salaries at mid-level and senior level are now comparable to that of US. Thats why you see jobs moving to china and elsewhere.[/quote]

This is a myth. Read the cost of living. You can easily find rentals that are upwards of 50K/month (yes month) in Bangalore. There are plenty in the 25K/35K category/month.

People who think there is tremendous cost savings in India are in for a rude shock. Houses/villas cost upwards of a crore. You should read the cost of living section. Even education is catching up.

I agree with the statement, that you should be paid equal wages or perhaps even more if you account for the accompanying hardships.

It is a different matter altogether that there will be undercutters. But then there will be compromise in quality. I know this for sure.
csvirus
Posts: 176
Joined: Thu Jun 28, 2007 1:48 pm

What is wrong with labor rate arbitrage?

Post by csvirus »

nand;73287it has to do with free market and supply and demand. nobody is forcing you to work. If you think it is unfair there are plenty others for whom this is more than fair. Ultimately wage rates are determined by the market and the market is fair. If wage lvels are the same in india and us, as a US CEO why will I come to India, it is logistically easier to get the work done in one place itself..[/quote]

Absolutely. Nobody is forcing anybody to work. It is free will employment. If you think you are worth much more, just don't go there. But if you stay in the US you had better watch out. In my few jobs in India, I have seen big contributors let go in the US, replaced by cheap "boys" from school. Although they are no match for the vision/execution they are still hired as they show a good balance sheet in the interim. Who cares in the long term? If it boomerangs the CEOs would be richer in 5 years when they voluntarily retire. Until then, the game will go on at the cost of rank & file...
csvirus
Posts: 176
Joined: Thu Jun 28, 2007 1:48 pm

What is wrong with labor rate arbitrage?

Post by csvirus »

layman;73306An ipod shuffle costs $70 while non branded MP3 players cost $20. An iMAC costs $1500 while you can get cheap ones for $400. Why? They both perform the same function. Why Dollar Tree sells stuff for $1 for which one has to pay double that amount outside?

Indian IT service is marketed as a volume play. As a cost saver. There is no company in India that says in its objective that it will deliver more value or ground breaking technologies compared to its US counterparts. They are there to provide a cheap volume play alternative to branded counterparts. The game in India is how to get your work done by a fresher or less experienced person so that they can get rid of you and save cost. The mid and senior executives get paid on par with US counterparts because the value proposition they provide is lower labor cost. They get paid high to reduce the salaries of others. Their whole aim is to find volume play alternatives such as college hires. It is alarming to see the rate at which engineers are produced every year in India.[/quote]


Bingo, Bingo, BINGO !!!

In addition, all other disciplines are also converted conveniently to become cheap foot soldiers. As a matter of fact the L&T CEO Naik in an interview with CNBC was complaining that all the big IT companies are gobbling up all sorts of graduates and converting them to their religion, and there are no engineers of the other kind. Go figure !! Infosys is planning to own about 1000 universities and hire people of their religion or convert them for profitable advantages. The poor foot soldiers don't have an idea of whats coming.

The only thing that prevents you from getting into this whirlpool is innovation, enterprise. If you are an employee you are toast!
csvirus
Posts: 176
Joined: Thu Jun 28, 2007 1:48 pm

What is wrong with labor rate arbitrage?

Post by csvirus »

KRV;73459OP,

Within each country, the immutable law of supply and demand determines what a labor unit is worth. How much is your time worth? It is worth exactly what someone will pay for, no more, no less. Labor arbitrage may be unfair to you because your *identical* labor got arbitraged as a result of your decision to return to India - so understandably, this is personal to you. The cross-world move that you made, while simple to you, is anywhere from difficult to impossible for most of your peer group in both India and U.S. That's why the labor arbitrage continues. The boundaries may be breached by some people like you so you feel the arbitrage, most of the people don't.

Any arbitrage will not sound fair if you are personally affected, but business thrives by capitalizing on any arbitrage opportunity they can get their hands on. This is no different than the material cost arbitrage advantage that resource-rich countries have - supply and demand again. Labor arbitrage is very much a part of capitalism.[/quote]

And that is exactly the reason why you must push for reservations for citizens of India now, so you can use it as a tool to fight any FTAs that India might enter into with the rest of the world. Do you see whats coming ? :emcry:. I do ...
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