Arnold Kling  

Block that Free Lunch

Benedict Arnold Legislators... Extreme Free Trade...

Russell Roberts speculates on what might happen if Indian outsourcing really gets out of hand.

suppose Indians decided to work for free and give away the software, the ultimate competitive threat. If outsourcing work to low-wage Indians is bad, surely free software from zero-wage Indians is even worse.

Free software would be hard for the U.S. workers in the software industry to compete with. But it would be a boon for America -- plenty of U.S. outfits would expand. Having free software would let a lot of new companies come into existence that couldn't have been profitable before. Programs at no cost would mean lower prices across the board. That would liberate resources to do new things all over the economy. Many of those out-of-work American programmers would find new jobs.

My guess is that free software would be subject to John Kerry's proposal requiring three-month advance notification for outsourcing.

Kerry's major rival for the nomination, North Carolina Sen. John Edwards, also supports the idea. He and Kerry are co-sponsors of legislation in the Senate that would require the 90-day notification.

Thanks to Kevin Brancato for the pointer to Roberts' piece. Kevin's value-added is a back-of-the-envelope calculation comparing the wages of low-skilled workers one hundred years ago to today.

For Discussion. Many European countries have laws that make it difficult to lay off workers. How have these laws affected their employment situation?

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COMMENTS (12 to date)
Eric Krieg writes:

>>But just how good were they? For their day, these jobs earned double the average manufacturing wage. But they are nothing special to speak of in today's terms. Deflating the $5 a day wage by the CPI-U (which is not really appropriate, but this is a blog post, not a dissertation) Ford's $5 a day is a wage of 5*(184/9.9)=$93 per day in 2003 dollars, or $10.35 per hour. The average Wal-Mart supercenter employee working in the grocery section--by opponents' accounts, some of the WORST JOBS EVER--makes about $10 an hour (page 25), not including benefits.

So some of the lowest-skilled service industry workers today are making as much or more than the best technically-skilled assembly line workers of Henry Ford's day. And that's because of outsourcing

Chris writes:

Message to Arnold

The lead article in NY Times business section is regarding Greenspan's warnings about Freddie Mac and Fannie Mae. He says they are relying on the perception that they will be bailed out the by federal government. Any thoughts?

David Foster writes:

I don't think it's correct to call the $5/day people "the best technically skilled" in any sense. The line allowed work to be designed so that minimal skill was required (other than doing repetitive work at a high rate of speed). There's nothing comparable there to the skills of, say, a toolmaker of the same time period.

Chirag Kasbekar writes:

Talking of free software, I wonder if outsourcing for the benefit of cheaper labour is analogous to using free (or cheaper) open source software in some way.

It's just a wild thought and might be quite inappropriate on reflection. But isn't using free open source software -- and the labour of volunteer programmers -- (esp. by commercial firms who sell these and build service businesses around them) similar in many ways to lowering labour costs by outsourcing to people who're willing to work for next to nothing (by US terms)?

Dreamer writes:

I am not an economist.

Whenever I apply my simple common sense I end up understanding that 'Outsourcing' is good.

I mean, a US corporation outsources for two reasons..

1) It can get the job done much cheaper and faster
2) It can get a superior product (quality software) for the same price

In both the cases it is US the corporation which is getting more bang for its buck. Which makes it more profitable...which is good. that process the corporation fires some people in one discipline and hires more in another. That is bound to happen even if there is a change in the company's policy or strategy.

I dont think any body outsources their IT because it is 'cool' or because they like India. There is an economic motive behind it. Right?

I dont understand this 'Indians stole my job' stuff. Arent Americans selling their 'Coke' and 'Chevrolet' in India?

--A clueless Indian dude.

David writes:

greetings from vienna!

considering the laws that make laying off of workers difficult, i would say that it has the effect of 1) static workforce that lands a job and stays in it for the entire career 2) more caution of hiring people.

the FPOe has introduced legislation that prolongues the proabatory time for student jobs from two to three months. that means the employer or employee may terminate the relationship with no explanation within this time, probably similar to the US "at will employment states". i don't know what the effect will be on student employment, stay tuned.

in general, i feel that the "free movement of labor" in the EU is undermined by overly strong pro union rules that make firing/laying off workers very difficult. difficult to fire to me implies "wary to hire".


Xavier writes:

Chirag: I've made that argument several times myself, but without much response. It sounds pretty persuasive to me.

Chirag Kasbekar writes:


I'd be glad to share credit with you for the idea. ;-) Though you've obviously thought of it first...

But seriously, has there been a serious study of the effects of the open source / free software phenomenon on its economic environment? Especially in terms of wage rates and job loss/gain?

Mcwop writes:

Chirag and others makes an excellent observation, and free software has yet to destroy some rather large software businesses. One could argue it enhanced the prospects of many businesses, and created jobs.

Eric Krieg writes:

Ford DOUBLED the average manufacturing wage. He WAS paying assembly line workers a wage comparable to more skilled workers.

Thinking of it in economic terms, that makes sense. The less skilled assembly line workers became more productive, and their wages reflected that productivity.

I don't think that it is all that different from Wal-Mart. Are Wal-Mart employees all that skilled? What justifies their wage premium over the minimum wage? Information Technology, that's what. Wal-Mart is the premier user of IT in the retailing field.

Lawrance George Lux writes:

I can't remember the exact cite, but there was a Chicago School of Economics study which states Job protection slowed the rate of technology intergration significantly (ratios of .7 slower depending on type of protection). Other Studies of years past have also suggested Job protection slows the rate of Wage increase also. lgl

JOhn Cunningham writes:

From everything that I have read about European labor protection laws, they make employers highly reluctant to hire new employees. I think I read somewhere that something like 25-30% of French people with BA degrees have never held a job in paid employment. That, to me, is a pretty damning comment on the unintended effects of such "worker friendly" laws.

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