July 8, 2007
The International Market for Talent
The International Market for Talent-Becker
Estimates suggest that intangible capital, which is mainly skilled employees, constitutes 70 per cent of the total capital of large American companies. Attracting and retaining skilled workers is the number one priority of these companies. The fundamental cause of the great emphasis being placed on talent is that production in modern economies is much more knowledge-intensive than production was in the past. This is because modern technologies and capital require abundant supplies of skilled workers to be effective. The competition for talent has raised earnings of skilled workers relative to other workers, and has led to an international search for the best and brightest.
When outsourcing of jobs to India (and other countries) began in earnest in the early 1990s, many software engineers and other highly skilled workers in India were available at wages much below those in the United States and Western Europe. Since the number of skilled workers in countries doing the outsourcing is large relative to the supply of underutilized workers in India, before long outsourcing absorbed all the available skilled workers in countries like India. As long as salaries of Indian workers benefiting from outsourcing were still far below those in America, the competition for these workers by American and Indian companies would be intense. This competition would push up the earnings of skilled Indian workers. Companies report that what they have to pay such skilled workers is rising rapidly: 10-15 per cent per year, and perhaps at much higher rates. The easier it is to outsource skilled jobs, and the closer is the substitution between work done in India and the United States, the larger would be the induced increase in salaries of skill workers in India from the growth in outsourcing. If Indian and American highly skilled employees were considered close substitutes by American companies, competition to employ the cheapest workers of a given quality would induce the salaries of such Indian workers to rise near parity with that of American workers of the same skills.
Of course, Indian and American workers are far from close substitutes because transportation and capital costs are cheaper to companies producing and selling in the American market. Hence outsourcing becomes uneconomic considerably before Indian and American salaries become equal. A front-page article in the Wall Street Journal several days ago indicated that a few high tech companies in Silicon Valley were closing their operations in India, and shifting them back to the United States. These companies lament that salaries of Indian technical employees are rising so rapidly that it has wiped out the advantage of staying in India.
Although outsourcing has certainly accelerated as well as reflected the international hunt for talent, outsourcing is not the only factor that has invigorated the talent market. Migration of skilled workers also is part of the competition across nations for talent. It has long been recognized that educated and skilled persons within a country move more easily than other workers to cities and regions that offer better paying and more attractive work and living conditions. This explains, for example, why earnings of college-educated persons in different parts of the United States are quite similar, much more so than the earnings of persons who did not go to college.
Movement of educated and skilled persons to places with better paying jobs operates across nations as well. Of course, international movement of people is blunted by the many restrictions imposed on immigration by richer nations. However, in their hunt for talent, countries have been making it easier for doctors, professors, and others with high tech and other skills to move legally across nations (although it may be easier for the less skilled to migrate illegally since they can work underground more readily). An increasing number of countries, such as Canada, Australia, and to a lesser extent the United States, have adopted point system for immigrants and passed various laws that offer skilled individuals work permits and permanent residency.
The international movement of talented workers has also greatly increased with the globalization of many companies. Global companies employ workers in different countries from very different backgrounds, and they have little hesitation to choose a president from say Scotland, a vice-president from France, or a head of the research department from India or China. Companies actively recruit skilled workers through H-1B and other programs designed to attract skilled workers, and they lobby for more generous programs that favor the immigration of skilled workers.
The supply of educated persons willing to move across countries has also increased considerably. Television and the Internet have homogenized cultures to a much greater extent than in the past. The decline in the cost of international air travel makes it much easier to return regularly to one's country of birth to visit family and old friends. Moreover, as the number of skilled immigrants from a country grows, other skilled immigrants from that country become more willing to emigrate since the new immigrants can expect to find friends and neighbors with similar backgrounds.
Technology and physical capital are complementary with skilled workers in the production process for most modern goods and services. Therefore, the growth during the past several decades in the international movement of capital and technologies through direct foreign investment in less developed countries has also contributed to the intense competition across countries for highly skilled workers.
Outsourcing and the International Market in Highly Skilled Workers--Posner's Comment
"Outsourcing" is a form of vertical "de-integration." "Vertical integration" refers to the form of business structure in which a firm owns a supplier or distributor rather than buying (from the seller) and selling (to the distributor). Hierarchical direction within an organization is substituted for contracting for output. The tradeoff is between the agency costs involved in directing people's work and the transaction costs involved in arms-length contracts. As markets grow, enabling greater specialization, there is a tendency to de-integration; vertical integration is attractive when the market for an input is so limited (maybe to just a single firm) that the supplier faces monopsony, which integration overcomes. Outsourcing is famously illustrated by IBM's decision to outsource the production of the operating systems for its computers to Microsoft; previously IBM made the operating systems itself.
As this example shows, there is nothing in the definition of outsourcing to connect it to foreign commerce. But the current anxiety about outsourcing focuses on the outsourcing of software development and other high-tech services to foreign nations, particularly India, and hardship to American skilled American workers whose jobs are outsourced.
Oddly, Americans who are opposed to free trade don't mind as much when Americans buy from foreigners as when they hire them, though the effect is the same. If Microsoft purchases software from an Indian company, the effect on American jobs is no different than if it hires Indian software engineers to work for Microsoft in India--or, for that matter, in the United States. If the latter arrangement is preferred, it makes no sense for Congress to make it difficult for American companies to hire highly skilled foreigners to work in the United States. In any event, the harder it is to obtain visas for highly skilled foreigners, the greater the incentive to outsource production to those highly skilled foreigners in their native lands. So restricting visas seems a futile measure for trying to protect American high-tech jobs.
The obvious difference between outsourcing and importing labor is that the foreign immigrants would command higher wages in the United States than in their native country. But they would also be more productive, because they would be working side by side with their American colleagues. Despite sophisticated video conferencing, face to face interactions are still considered highly important to productivity. It is the low wages in countries like India that makes outsourcing so attractive, but as Becker points out, U.S. and other foreign (foreign to India, that is) demand results in bidding up the wages of highly skilled Indians in India, which acts as a brake on outsourcing.
It could be argued that outsourcing high-tech jobs creates human capital in the outsource nations, like India, and that the result may be greater competition from the high-tech sectors in those nations in the future. A U.S. company might not take this effect of its outsourcing into account in deciding whether or how much to outsource, because of free-riding problems. Its forbearance to outsource would benefits its competitors, but it would not be compensated by their for conferring the benefit. If this is a concern, it argues for relaxing visa restrictions on high-tech foreigners, since once established in the United States they are unlikely to take the skills they learn here back to their native country. Some will, but most will rapidly become assimilated Americans. However, there would be no externality if the foreign workers in their outsource jobs pay for their own training in the form of accepting lower wages.
The costs of outsourcing are concentrated on Americans who lose their jobs or are paid less because of outsourcing to foreign countries, and the benefits, though they probably exceed the costs, are diffuse. The benefits in the form of consumer surplus and greater labor demand (but not necessarily in the jobs that are outsourced) in the United States as a result of the reduction in costs that the outsourcing firms experience as a result of outsourcing--if there were no net reduction in quality-adjusted costs, there would be no outsourcing. When the costs of a policy or practice are concentrated but the benefits diffuse, there is an asymmetry of political pressure, and this may explain the visa resterictions. But from a neutral standpoint of aggregate (and average) economic welfare, there is no compelling case for limiting outsourcing--or for stinginess in granting work permits to highly skilled foreigners.