I’m very confused why purchasing power varies so dramatically internationally. like why are there countries where everyone has very low wages but everything is also really cheap so it balances out? prima facie, huge disparities like this should get evened out by arbitrage.
the simple explanation is that some labor can only be performed locally, labor mobility is limited (immigration laws, people don’t like moving, etc), and transportation costs for goods exist (shipping and tariffs).
however, global shipping is ridiculously cheap. and the economy increasingly consists of white collar jobs which could in theory be done remotely. for example, it seems it mind boggling to me that a top tier SWE/RS in the bay area is worth 10-100x more than one in India or Vietnam. like sure, someone being in the same timezone is great, and Zoom sucks, and so on. but for that price delta surely you could pay people to live nocturnally, construct apartments with bright lights synced to Pacific Time, invest in much better video call technology like that Google Beam thingy, etc?
maybe one possibility is that labor mobility is not actually that low for the very toppest tier people, and so if someone is actually worth that much then getting them good immigration lawyers is a trivial cost relative to their value/cost. so the market for the best people is very efficient and they all brain drain to the bay area the first chance they have. and so the lower salary of outsourcing is partly illusory at the highest levels, because the distribution of talent is very different across different localities, due to agglomeration effects.
In what sense does it actually balance out? e.g. in India, unskilled labor is a lot cheaper, so lots of upper middle class people have servants. But the price of an iPhone in India is pretty similar to the price of an iPhone in the US.
So my impression is that the typical basket of goods and services that people consume in different places around the world at roughly equivalent / analogous relative economic classes actually does vary quite a bit. Anything with a labor component will naturally scale up and down for balance, but staples and stuff made in factories doesn’t vary that much. In the US for example, labor of all types is very expensive, so people don’t have servants, but most people can afford a pretty much endless supply of trinkets and gadgets.
The cost of food above subsistence level is mostly labor / discretionary. I could live on beans and rice and spices bought in bulk for a tiny fraction of my income pretty much anywhere in the world, but I’d often rather pay to have someone prepare something nice and then bring it to my door.
So maybe a different / more general answer to the question you originally posed is that stuff that’s truly pure “stuff” is actually a relatively small fraction of what people consume—most consumption by dollar value is actually (indirectly) consumption of labor, which often has to be local.
Making raw potatoes available to buy also requires some local labour and renting a local warehouse / supermarket. I think labour and rent are upstream of ~all of the differences in local purchasing power. To me, the main question is why so much software is being built in SF as opposed to cheaper areas, and I find this confusing but I think the bay is something like a schelling point for tech talent and tech firms, and remote work unfortunately just doesn’t work well enough. And something similar is true for other expensive high-income places.
I worked on a international team during my time at F5 and we had offices in Ireland, Poland, two timezones in the US, Australia and India. The assumption that we could teleconference our way out of geography was a laughable failure for one reason that your hypothetical “nocturnal white collar sweatshops” fails to address: Humans work to live, we don’t live to work. Well, most of us that is, and the unbalanced folks (the 10x engineers as they are now called) who would work across timezones burned out dramatically (I was one of them). Why are silicon valley jobs so lucrative but also cost of living so high? Because the people there have children in schools, they socialize with people outside their work and they generally live a life not just work. So how does this play out in a workplace?
Engineering planning has to happen at some hour, it is naturally inconvenient for outliers (Poland is meeting at 7pm thinking about how they missed dinner with their kids, and the engineers from Delhi are up at 11:30pm likely sneaking a nap in before the meeting, and the team in Seattle is just finishing their morning coffee). This creates a situation where both sides of the distribution are overtired, distracted or disengaged while the “middle” of the probability is decided by the VP or C suite living in the US. So the team sees it won’t work, they try something else:
Next teams are geographically isolated by tasks. India, inevitably becomes either the devops or the testing team because of intrinsic bias by executives and they are always playing catch up. Devops requests have a 1 day latency at best, responses to bugs have a latency on the other side. The India team is simultaneously “too slow” when doing ops, and “put on hold” when reporting bugs. Meanwhile the folks in Poland are left clocking out right as the US co-workers are clocking in so any cross team design/testing/ops is likewise put off one day at best, and weekends become amplified to 3 days effectively creating a 4 day work week.
The unfortunate reality is that humans, when healthy, are anchored to geography. From recreation to raising children, to caring for aging parents everyone will be bound by their timezone regardless of how it would optimize the global machine of infinite growth with finite resources.
Even when it does technically work, people underestimate the social dynamics. I knew somone who worked in Singapore for a Canadian company. Her dinner would be going cold on the table and her children wondering why mummy wasnt joining for bedtime stories while her teleconferenced meeting in Canada overrun by an hour as they all complained about having to get in at 8am and how the weather was bad in Toronto. Complaints from her and others in SG soon made it clear that these meetings had to be done as fast as possible and that mentioning anything off topic, eg the weather, random pleasantries, traffic, was liable to result in interuption/complaint from someone in singapore.
So, you can have the meetings, but freindly chit chat, going off topic or similar is completely shut down. That worked much better, shortening the meetings and letting the signapore lot at least feel their time was being valued, but doing meetings that was is not natural to people.
If they had tried some weird ‘work in a canadian time zone’ thing then the person I knew, and probably the whole team, would have quit. Maybe unmarried 20-somethings could do that for a little while, but as they gained partners and kids it would stop working for them.
to be clear, i’ve worked remotely, and i know exactly how the social dynamics can suck. maybe this would be a reasonable argument for why you wouldn’t do it for a 30% pay raise. but the disparity is so enormous (anywhere between a 2x and 100x, depending on where you are in the world and how good you are) that there must surely be a lot of people who would take the money and deal with it.
Yes, it can work. Reflecting more I think the issue is maybe that you need to be clear from the beginimg wether you are telling your overseas workers ‘your timetable will suck but we are paying super over the odds to cover that’ or are doing something more ‘normal’. (+100% vs +30%). The first was never the bargain in my example above, hence some of the frustration.
Both have advantages and disadvantages. In the former, the employees will just accept the timetable. But, you will mostly get younger, more junior (single) people, and they wont be the most capable or best qualified people, who will go for something normal. I suspect high turnover, a couple of years of highly paid nocturnal behaivior to then take that experience to try and get a more normal job where you can actually have a family, makes sense.
Instead of a ‘half move’ you have the alternative of a ‘full move’, where you move the whole operation (taking the people you need with you). On a much smaller scale some software companies did this a decade or two ago by moving from London to Bristol where property prices were lower (very short move, they are only 1.5 hours appart by train.)
you could also move to some country like Paraguay with relatively lax immigration laws and a US timezone, and work remotely from there. this is probably a better option than nocturnal living for a lot of people.
I’ve worked completely nocturnally before. it wasn’t the best experience in the world, and probably wouldn’t have been sustainable in the long run, but there are a lot of jobs out there that are way more demanding (submarine, space, oil rig).
I don’t understand it either. I work in Germany with near-shoring colleagues in Slovakia, Serbia, Georgia etc. They are roughly 60% cheaper than German SWEs, generally just as competent, no time-zone problems whatsoever … basically all the work even with German team members is fully remote so even that is not a difference. Only the need for English creates some minor friction. No idea how this state of affairs makes economic sense now or ever did.
There’s a whole lot of things where marginal cost is very low, even though average cost is somewhat high (due to startup and fixed costs). For these things, selling “extra” stuff at low prices in markets that don’t leak back to interfere with the primary revenue sources is incremental profit without downside.
This plus the differential in labor costs, which are often significant for last-mile delivery (getting things into consumers’ hands), makes it pretty understandable why the law of one price (the idea that if transport and transaction costs are tiny, things are priced identically) doesn’t apply for many things.
When it comes to salaries of knowledge workers like software engineers, a lot of decisions come down to the decisions of managers who not only care about what’s good for the company but has their own desires as well. A manager prefers employees that are in the office and as near as possible so that they feel they have power over the employees. This goes for middle management as well.
Someone in companies like Google that do have offices in India the internal company politics don’t play out in a way that result in drastically increasing their headcount in India.
I’m very confused why purchasing power varies so dramatically internationally. like why are there countries where everyone has very low wages but everything is also really cheap so it balances out? prima facie, huge disparities like this should get evened out by arbitrage.
the simple explanation is that some labor can only be performed locally, labor mobility is limited (immigration laws, people don’t like moving, etc), and transportation costs for goods exist (shipping and tariffs).
however, global shipping is ridiculously cheap. and the economy increasingly consists of white collar jobs which could in theory be done remotely. for example, it seems it mind boggling to me that a top tier SWE/RS in the bay area is worth 10-100x more than one in India or Vietnam. like sure, someone being in the same timezone is great, and Zoom sucks, and so on. but for that price delta surely you could pay people to live nocturnally, construct apartments with bright lights synced to Pacific Time, invest in much better video call technology like that Google Beam thingy, etc?
maybe one possibility is that labor mobility is not actually that low for the very toppest tier people, and so if someone is actually worth that much then getting them good immigration lawyers is a trivial cost relative to their value/cost. so the market for the best people is very efficient and they all brain drain to the bay area the first chance they have. and so the lower salary of outsourcing is partly illusory at the highest levels, because the distribution of talent is very different across different localities, due to agglomeration effects.
In what sense does it actually balance out? e.g. in India, unskilled labor is a lot cheaper, so lots of upper middle class people have servants. But the price of an iPhone in India is pretty similar to the price of an iPhone in the US.
So my impression is that the typical basket of goods and services that people consume in different places around the world at roughly equivalent / analogous relative economic classes actually does vary quite a bit. Anything with a labor component will naturally scale up and down for balance, but staples and stuff made in factories doesn’t vary that much. In the US for example, labor of all types is very expensive, so people don’t have servants, but most people can afford a pretty much endless supply of trinkets and gadgets.
food and rent are two big ones. they’re both vastly cheaper elsewhere
The cost of food above subsistence level is mostly labor / discretionary. I could live on beans and rice and spices bought in bulk for a tiny fraction of my income pretty much anywhere in the world, but I’d often rather pay to have someone prepare something nice and then bring it to my door.
So maybe a different / more general answer to the question you originally posed is that stuff that’s truly pure “stuff” is actually a relatively small fraction of what people consume—most consumption by dollar value is actually (indirectly) consumption of labor, which often has to be local.
raw potatoes cost about $2/kg in the US, $0.50/kg in china, and $0.25/kg in india. so it’s clearly not just the cost of preparation.
Making raw potatoes available to buy also requires some local labour and renting a local warehouse / supermarket. I think labour and rent are upstream of ~all of the differences in local purchasing power. To me, the main question is why so much software is being built in SF as opposed to cheaper areas, and I find this confusing but I think the bay is something like a schelling point for tech talent and tech firms, and remote work unfortunately just doesn’t work well enough. And something similar is true for other expensive high-income places.
I worked on a international team during my time at F5 and we had offices in Ireland, Poland, two timezones in the US, Australia and India. The assumption that we could teleconference our way out of geography was a laughable failure for one reason that your hypothetical “nocturnal white collar sweatshops” fails to address: Humans work to live, we don’t live to work. Well, most of us that is, and the unbalanced folks (the 10x engineers as they are now called) who would work across timezones burned out dramatically (I was one of them). Why are silicon valley jobs so lucrative but also cost of living so high? Because the people there have children in schools, they socialize with people outside their work and they generally live a life not just work. So how does this play out in a workplace?
Engineering planning has to happen at some hour, it is naturally inconvenient for outliers (Poland is meeting at 7pm thinking about how they missed dinner with their kids, and the engineers from Delhi are up at 11:30pm likely sneaking a nap in before the meeting, and the team in Seattle is just finishing their morning coffee). This creates a situation where both sides of the distribution are overtired, distracted or disengaged while the “middle” of the probability is decided by the VP or C suite living in the US. So the team sees it won’t work, they try something else:
Next teams are geographically isolated by tasks. India, inevitably becomes either the devops or the testing team because of intrinsic bias by executives and they are always playing catch up. Devops requests have a 1 day latency at best, responses to bugs have a latency on the other side. The India team is simultaneously “too slow” when doing ops, and “put on hold” when reporting bugs. Meanwhile the folks in Poland are left clocking out right as the US co-workers are clocking in so any cross team design/testing/ops is likewise put off one day at best, and weekends become amplified to 3 days effectively creating a 4 day work week.
The unfortunate reality is that humans, when healthy, are anchored to geography. From recreation to raising children, to caring for aging parents everyone will be bound by their timezone regardless of how it would optimize the global machine of infinite growth with finite resources.
I second all this.
Even when it does technically work, people underestimate the social dynamics. I knew somone who worked in Singapore for a Canadian company. Her dinner would be going cold on the table and her children wondering why mummy wasnt joining for bedtime stories while her teleconferenced meeting in Canada overrun by an hour as they all complained about having to get in at 8am and how the weather was bad in Toronto. Complaints from her and others in SG soon made it clear that these meetings had to be done as fast as possible and that mentioning anything off topic, eg the weather, random pleasantries, traffic, was liable to result in interuption/complaint from someone in singapore.
So, you can have the meetings, but freindly chit chat, going off topic or similar is completely shut down. That worked much better, shortening the meetings and letting the signapore lot at least feel their time was being valued, but doing meetings that was is not natural to people.
If they had tried some weird ‘work in a canadian time zone’ thing then the person I knew, and probably the whole team, would have quit. Maybe unmarried 20-somethings could do that for a little while, but as they gained partners and kids it would stop working for them.
to be clear, i’ve worked remotely, and i know exactly how the social dynamics can suck. maybe this would be a reasonable argument for why you wouldn’t do it for a 30% pay raise. but the disparity is so enormous (anywhere between a 2x and 100x, depending on where you are in the world and how good you are) that there must surely be a lot of people who would take the money and deal with it.
Yes, it can work. Reflecting more I think the issue is maybe that you need to be clear from the beginimg wether you are telling your overseas workers ‘your timetable will suck but we are paying super over the odds to cover that’ or are doing something more ‘normal’. (+100% vs +30%). The first was never the bargain in my example above, hence some of the frustration.
Both have advantages and disadvantages. In the former, the employees will just accept the timetable. But, you will mostly get younger, more junior (single) people, and they wont be the most capable or best qualified people, who will go for something normal. I suspect high turnover, a couple of years of highly paid nocturnal behaivior to then take that experience to try and get a more normal job where you can actually have a family, makes sense.
Instead of a ‘half move’ you have the alternative of a ‘full move’, where you move the whole operation (taking the people you need with you). On a much smaller scale some software companies did this a decade or two ago by moving from London to Bristol where property prices were lower (very short move, they are only 1.5 hours appart by train.)
you could also move to some country like Paraguay with relatively lax immigration laws and a US timezone, and work remotely from there. this is probably a better option than nocturnal living for a lot of people.
I’ve worked completely nocturnally before. it wasn’t the best experience in the world, and probably wouldn’t have been sustainable in the long run, but there are a lot of jobs out there that are way more demanding (submarine, space, oil rig).
I don’t understand it either. I work in Germany with near-shoring colleagues in Slovakia, Serbia, Georgia etc. They are roughly 60% cheaper than German SWEs, generally just as competent, no time-zone problems whatsoever … basically all the work even with German team members is fully remote so even that is not a difference. Only the need for English creates some minor friction. No idea how this state of affairs makes economic sense now or ever did.
This overstates it a bit, but has a LOT of explanatory power: https://www.econlib.org/archives/2009/11/price_discrimin_2.html Price Discrimination Explains Everything.
There’s a whole lot of things where marginal cost is very low, even though average cost is somewhat high (due to startup and fixed costs). For these things, selling “extra” stuff at low prices in markets that don’t leak back to interfere with the primary revenue sources is incremental profit without downside.
This plus the differential in labor costs, which are often significant for last-mile delivery (getting things into consumers’ hands), makes it pretty understandable why the law of one price (the idea that if transport and transaction costs are tiny, things are priced identically) doesn’t apply for many things.
When it comes to salaries of knowledge workers like software engineers, a lot of decisions come down to the decisions of managers who not only care about what’s good for the company but has their own desires as well. A manager prefers employees that are in the office and as near as possible so that they feel they have power over the employees. This goes for middle management as well.
Someone in companies like Google that do have offices in India the internal company politics don’t play out in a way that result in drastically increasing their headcount in India.