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Näytetään tekstit, joissa on tunniste economics. Näytä kaikki tekstit
torstai 18. joulukuuta 2008
tiistai 16. joulukuuta 2008
The economics of 100-fold wage differences
Imagine that you could hire a worker for 25 euros a month, provided that you pay housing and a few meals. What consequences would it have?
Finnish mentality is that when you are at work, you should be doing some task which fulfills the goals of the organization (this includes being on watch for orders). If you're not, then the work is not well organized or you're lazy.
But if work is cheap, why bother about efficiency. Downtime and idleness are ok. For example, our auto driver waits in the hall for the 8-9 hours that we are at work. Since wage gap is so big, it's not a big hit.
Secondly, if you really need to get something done, you can afford to hire several people to do the job, and possibly even to supervise them. In many restaurants and guardspots in Hyderabad, you see disproportionate number or workers in a workplace. At extreme, a restaurant can have 10 people in the kitchen and at the table waiting without many customers being visible before we arrive.
Let's compare two ways to arrange auto rides. In "taxi model" you have highly independet drivers who drive for different customers. They may have schedules where they have to be at certain places at certain times. In "chauffeur model" you have a dedicated driver for each customer. The chauffeurs wait for their customers.
Suppose we have 10 groups who need transportation. Because of schedule overlaps, they would need 10 chauffeurs or 3 taxi drivers for their transportation needs. In the taxi model, the 10 - 3 = 7 remaining drivers would be free to do other work. Total utility would be higher in the taxi model, because in the chauffeur model nobody would do the work of the 7 more people who are reserved.
Also suppose that the customers are willing to pay equal amount for chauffeurs or taxis. In the taxi model each taxi driver would get x/3 money while in chauffeur model they would get x/10 money.
This way big wage differences cause big Pareto inefficiency in total utility. This does not mean that small wage differences are optimal either - in Finland, lots of valuable work which is nevertheless less valuable than minimum union pay is not done at all because you can't pay workers a lower pay which matches the value the job would create.
This inefficiency must be a huge factor in keeping India a developing country.
In army, serving is defined in terms of hierarchy rather than job task or area of responsibility. Soldiers do what they are told to do, rather than doing some specific tasks. They are serving successfully when they obey the orders of their superiors. If their superiors don't give them orders, then idling is ok.
Defining work by hierarchy is inefficient in most cases, because independent mindset enables workers to complete much more difficult tasks by using common sense and asking questions and spending time to finding out rather than just doing what they are told. Also people are willing to put extra effort when it enables them to get better control of their day. Control over own work is a big motivator.
Large wage differences make it affordable to put hierarchy above job tasks and areas of responsibility, since you can afford inefficiency. The result is a more hierarchical work culture.
When work is cheap, some of it is inevitably wasted. Guards are posted on locations where they know they don't serve any purpose and decorations are built on whim without much planning for beauty or visibility. This teaches people not to pay too much attention to the significance of work they do.
Another for of insignificance is replacability. People know they are insignificant if they are one in a big group doing identical things. If they know that monetarily and rule-wise it would be trivial to fire them but their track record of obedience and getting things done keeps them employed. In case of just following orders even track record may not carry much weight.
Yes, the difference between our wages is about 100-fold according to our best guesses. When we came to house, we didn't know that they include house servants. That's how little their wage is from the total rent. Their role is to clean our clothes, rooms and make breakfast.
We could tell them to do stuff, but I can't imagine much anything they could do for us. Upstairs they have told them to get booze from the wine shop but even that is easier done ourselves: we drive past wine shop everyday and when we shop ourselves we can see what's available and try new options.
The attitudes of the house servants are quite servile, they are ready to do things for us and understand the full implications of huge imbalance in economic bargaining power.
He doesn't speak much English so I can't effectively interview him. Cleaning and breakfast are done identically every day. I'm sure we would ask some different kind of breakfast sometimes if communication worked fluently.
Frankly, I have great problems understanding the need and existence of servant tradition, which is not even organized around the "taxi model" of one house servant going through a large batch or flats. Manoj, my Indan coworker in Finland described it in the following way:
"Having a servant or helper is not a strange concept in India. May be we got this culture from the British. But you know, there are little too many people there and all of them have to be in some jobs to make their living. Since the salary levels of servants are not high, many people can afford them. But this is not true in all places. In my home town in Kerala, getting a good servant for reasonable monthly payment is one of the most difficult task for most of the families. And there servants switch the jobs quite often as the demand for them is bit too high. Also those servants usually work in multiple homes as "time shifts", something like 2 hours in every home. They do various jobs like, cleaning, washing, cooking etc. It is bit similar to cleaners in Finland. One difference in Finland is that there are machines for almost everything and workers don't have to do lot of manual job and those cleaners might be permanent employees of some company and eligible for all social security benefits like any other employees, which is not the case in India. Also the salary levels of cleaners are so high that people in here can't think of their home cleaned everyday by cleaners, even if they don't want to do their job :)
The system of servant living in your home is not very common atleast in my place. They usually come and finish the work and go to their home. In Hyderabad and in some other big cities, there is the concept like servant and his/her family stays in a small out-house next to your home or nearby. This is because the servants are from a very far place from the city that they can't commute to their home daily. Some house owners like to keep a servant when he/she is giving his house or apartment for rent, for the reason that he wants to keep his house clean and well maintained. The owners think that the tenants don't maintain the house well, which is very often true. Especially with unmarried Indian males :)
Hope you can communicate with the servant in English. Some servants have a bad reputation of stealing money and valuable things. So keep your valuables locked. You can even lock your bedroom or other room, where you keep most of your valuables. People do that. I don't know if that is the reason that all Indian rooms can be separately locked too, unlike in Finland :) Then for cleaning that particular room, you can ask the servant to do it when you are present, on weekends for example."
(The emphasis on overpopulation comment was mine. In the agribusiness post, also Bandi agreed that India is overpopulated.)
If it's cheap, buy more than you need
Finnish mentality is that when you are at work, you should be doing some task which fulfills the goals of the organization (this includes being on watch for orders). If you're not, then the work is not well organized or you're lazy.
But if work is cheap, why bother about efficiency. Downtime and idleness are ok. For example, our auto driver waits in the hall for the 8-9 hours that we are at work. Since wage gap is so big, it's not a big hit.
Secondly, if you really need to get something done, you can afford to hire several people to do the job, and possibly even to supervise them. In many restaurants and guardspots in Hyderabad, you see disproportionate number or workers in a workplace. At extreme, a restaurant can have 10 people in the kitchen and at the table waiting without many customers being visible before we arrive.
Inefficiency
Let's compare two ways to arrange auto rides. In "taxi model" you have highly independet drivers who drive for different customers. They may have schedules where they have to be at certain places at certain times. In "chauffeur model" you have a dedicated driver for each customer. The chauffeurs wait for their customers.
Suppose we have 10 groups who need transportation. Because of schedule overlaps, they would need 10 chauffeurs or 3 taxi drivers for their transportation needs. In the taxi model, the 10 - 3 = 7 remaining drivers would be free to do other work. Total utility would be higher in the taxi model, because in the chauffeur model nobody would do the work of the 7 more people who are reserved.
Also suppose that the customers are willing to pay equal amount for chauffeurs or taxis. In the taxi model each taxi driver would get x/3 money while in chauffeur model they would get x/10 money.
This way big wage differences cause big Pareto inefficiency in total utility. This does not mean that small wage differences are optimal either - in Finland, lots of valuable work which is nevertheless less valuable than minimum union pay is not done at all because you can't pay workers a lower pay which matches the value the job would create.
This inefficiency must be a huge factor in keeping India a developing country.
Hierarchy over work tasks
In army, serving is defined in terms of hierarchy rather than job task or area of responsibility. Soldiers do what they are told to do, rather than doing some specific tasks. They are serving successfully when they obey the orders of their superiors. If their superiors don't give them orders, then idling is ok.
- They can never say "I competed my tasks, I'll go to leisure now."
- They can't effectively plan into future, because the don't know their superior's orders.
Defining work by hierarchy is inefficient in most cases, because independent mindset enables workers to complete much more difficult tasks by using common sense and asking questions and spending time to finding out rather than just doing what they are told. Also people are willing to put extra effort when it enables them to get better control of their day. Control over own work is a big motivator.
Large wage differences make it affordable to put hierarchy above job tasks and areas of responsibility, since you can afford inefficiency. The result is a more hierarchical work culture.
Insignificance
When work is cheap, some of it is inevitably wasted. Guards are posted on locations where they know they don't serve any purpose and decorations are built on whim without much planning for beauty or visibility. This teaches people not to pay too much attention to the significance of work they do.
Another for of insignificance is replacability. People know they are insignificant if they are one in a big group doing identical things. If they know that monetarily and rule-wise it would be trivial to fire them but their track record of obedience and getting things done keeps them employed. In case of just following orders even track record may not carry much weight.
Case study: Solomon the house servant
Yes, the difference between our wages is about 100-fold according to our best guesses. When we came to house, we didn't know that they include house servants. That's how little their wage is from the total rent. Their role is to clean our clothes, rooms and make breakfast.
We could tell them to do stuff, but I can't imagine much anything they could do for us. Upstairs they have told them to get booze from the wine shop but even that is easier done ourselves: we drive past wine shop everyday and when we shop ourselves we can see what's available and try new options.
The attitudes of the house servants are quite servile, they are ready to do things for us and understand the full implications of huge imbalance in economic bargaining power.
He doesn't speak much English so I can't effectively interview him. Cleaning and breakfast are done identically every day. I'm sure we would ask some different kind of breakfast sometimes if communication worked fluently.
Frankly, I have great problems understanding the need and existence of servant tradition, which is not even organized around the "taxi model" of one house servant going through a large batch or flats. Manoj, my Indan coworker in Finland described it in the following way:
"Having a servant or helper is not a strange concept in India. May be we got this culture from the British. But you know, there are little too many people there and all of them have to be in some jobs to make their living. Since the salary levels of servants are not high, many people can afford them. But this is not true in all places. In my home town in Kerala, getting a good servant for reasonable monthly payment is one of the most difficult task for most of the families. And there servants switch the jobs quite often as the demand for them is bit too high. Also those servants usually work in multiple homes as "time shifts", something like 2 hours in every home. They do various jobs like, cleaning, washing, cooking etc. It is bit similar to cleaners in Finland. One difference in Finland is that there are machines for almost everything and workers don't have to do lot of manual job and those cleaners might be permanent employees of some company and eligible for all social security benefits like any other employees, which is not the case in India. Also the salary levels of cleaners are so high that people in here can't think of their home cleaned everyday by cleaners, even if they don't want to do their job :)
The system of servant living in your home is not very common atleast in my place. They usually come and finish the work and go to their home. In Hyderabad and in some other big cities, there is the concept like servant and his/her family stays in a small out-house next to your home or nearby. This is because the servants are from a very far place from the city that they can't commute to their home daily. Some house owners like to keep a servant when he/she is giving his house or apartment for rent, for the reason that he wants to keep his house clean and well maintained. The owners think that the tenants don't maintain the house well, which is very often true. Especially with unmarried Indian males :)
Hope you can communicate with the servant in English. Some servants have a bad reputation of stealing money and valuable things. So keep your valuables locked. You can even lock your bedroom or other room, where you keep most of your valuables. People do that. I don't know if that is the reason that all Indian rooms can be separately locked too, unlike in Finland :) Then for cleaning that particular room, you can ask the servant to do it when you are present, on weekends for example."
(The emphasis on overpopulation comment was mine. In the agribusiness post, also Bandi agreed that India is overpopulated.)
sunnuntai 7. syyskuuta 2008
The economics of offshore subcontracting
Basic forces
Companies want cost savings when they move their business to offshore countries. This is the first driving factor.
The second is supply and demand: if it is cheap to do some job, say, in Vietnam, then the companies that offshore to Vietnam will be more profitable and win market share or more companies will come to Vietnam. Either way, the demand for work in Vietnam will increase, raising wages. Eventually, some balance will be reached where offshoring is no longer a bargain. This may happen in several ways: In India, the wages have increased. Also, offshored people by definition can't be face-to-face with the customer, may speak lousier English, and have cultural differences, so there is a quality tradeoff: an offshored person is not as good as a local one.
Trust must be an important factor that inhibits offshoring, but I don't know much about it, since when the managers call my number they have already established basic trust between the two companies. However, the trip we do to India is the first transaction with the Indian customer. Establishing deeper levels of trust will happen if the customer perceives that Finnish subcontratees fulfilled expectations and provided good value for money.
Indianization
They say that India used to be cheap, and the cost per employee was about 1/10 of Finnish level 10 years ago. (These are extremely rough numeric estimates and based on hearsay.) Now the wage level is about 1/2 of Finnish levels. In this situation, it is in my case profitable to ship specific expertise from Finland to India. I'm sure that the Indian customer asked offers from several companies before deciding on us. Here's a new word to describe the phenomena:
Indianization: The process of dirt cheap offshoring countries moving up in the subcontracting chain. Characteristic features: Wages increase. The direction of subcontracting relative to Western countries is no longer one-directional but unbalanced bidirectional. New, cheaper countries take the same role which Indianized countries used to serve.
The direction is still mostly the other way around: work goes to India and Indians. I've heard recently about one testing department which started in India, and saw how people's work was moved there. New work was found for the Finnish emloyees. Also, I know several Indians who work for Finnish companies. The Indians get better wage and can enjoy Finnish freedom, safety and affluence.
Our company has a division in Bulgaria. The per-employee cost level is about 1/5 of Finland. They also say that when Indians want cheap programming labor, they subcontrant work to Vietnam/Thailand (don't remember which). Eastern Europe has done great economic progress after the fall of the iron curtain, so I hope and expect them to indianize quickly.
Here's what I've heard about the division of labor between offshore units and units which are local to customer. Basically, the communication-intensive and trust-intensive part of writing new software is done near the customer, where the subcontracting company(s) and the customers can sit around the same table and are immersed in the same culture. Testing and maintenance can be moved to offshore countries, because testing requires less communication and maintenance is less critical - after all, the is product by defintion "ready" when the maintenance part starts.
The politics of offshoring and the marginal employee
Basic microeconomics predicts that cheaper IT work means more IT work gets done. Customer companies get better systems for the same money, and they can afford to buy useful systems that would not have been implemented with first-world prices. Also, indianization is great for increasing the standard of living in less developed countries.
Offshoring is also a political threat, as the people in Western countries lose jobs as their work is moved to India. This also reduces the bargaining power and wages of the remaining emloyees.
By marginal employee I mean a Finnish emloyee who is just barely recruited to a company, because his or her skills are poor and/or track record is lacking. In the times of techno bubble in the 2000s, less was expected from the marginal employe. Many people studied a few years of computing science and then went to work. When the bubble burst, some of them got back to school to finish their degrees. A person in a student sauna commented that "sanity had been restored". This way, history has demonstrated the expectations for the marginal employee shift. Offshoring is a big threat for the marginal employee, because increasing the pool of workers means that more track record and skill can be expected from chosen workers.
Here are some predictions about political attitudes: Americans should be more concerned than Finns, because they have more to lose since the wage gap is wider. Seeing bidirectional subcontracting should reduce the fear of offshoring. Testers and less skilled programmers should be more concerned about offshoring and less sympathetic to the global advantages of indianization.
Companies want cost savings when they move their business to offshore countries. This is the first driving factor.
The second is supply and demand: if it is cheap to do some job, say, in Vietnam, then the companies that offshore to Vietnam will be more profitable and win market share or more companies will come to Vietnam. Either way, the demand for work in Vietnam will increase, raising wages. Eventually, some balance will be reached where offshoring is no longer a bargain. This may happen in several ways: In India, the wages have increased. Also, offshored people by definition can't be face-to-face with the customer, may speak lousier English, and have cultural differences, so there is a quality tradeoff: an offshored person is not as good as a local one.
Trust must be an important factor that inhibits offshoring, but I don't know much about it, since when the managers call my number they have already established basic trust between the two companies. However, the trip we do to India is the first transaction with the Indian customer. Establishing deeper levels of trust will happen if the customer perceives that Finnish subcontratees fulfilled expectations and provided good value for money.
Indianization
They say that India used to be cheap, and the cost per employee was about 1/10 of Finnish level 10 years ago. (These are extremely rough numeric estimates and based on hearsay.) Now the wage level is about 1/2 of Finnish levels. In this situation, it is in my case profitable to ship specific expertise from Finland to India. I'm sure that the Indian customer asked offers from several companies before deciding on us. Here's a new word to describe the phenomena:
Indianization: The process of dirt cheap offshoring countries moving up in the subcontracting chain. Characteristic features: Wages increase. The direction of subcontracting relative to Western countries is no longer one-directional but unbalanced bidirectional. New, cheaper countries take the same role which Indianized countries used to serve.
The direction is still mostly the other way around: work goes to India and Indians. I've heard recently about one testing department which started in India, and saw how people's work was moved there. New work was found for the Finnish emloyees. Also, I know several Indians who work for Finnish companies. The Indians get better wage and can enjoy Finnish freedom, safety and affluence.
Our company has a division in Bulgaria. The per-employee cost level is about 1/5 of Finland. They also say that when Indians want cheap programming labor, they subcontrant work to Vietnam/Thailand (don't remember which). Eastern Europe has done great economic progress after the fall of the iron curtain, so I hope and expect them to indianize quickly.
Here's what I've heard about the division of labor between offshore units and units which are local to customer. Basically, the communication-intensive and trust-intensive part of writing new software is done near the customer, where the subcontracting company(s) and the customers can sit around the same table and are immersed in the same culture. Testing and maintenance can be moved to offshore countries, because testing requires less communication and maintenance is less critical - after all, the is product by defintion "ready" when the maintenance part starts.
The politics of offshoring and the marginal employee
Basic microeconomics predicts that cheaper IT work means more IT work gets done. Customer companies get better systems for the same money, and they can afford to buy useful systems that would not have been implemented with first-world prices. Also, indianization is great for increasing the standard of living in less developed countries.
Offshoring is also a political threat, as the people in Western countries lose jobs as their work is moved to India. This also reduces the bargaining power and wages of the remaining emloyees.
By marginal employee I mean a Finnish emloyee who is just barely recruited to a company, because his or her skills are poor and/or track record is lacking. In the times of techno bubble in the 2000s, less was expected from the marginal employe. Many people studied a few years of computing science and then went to work. When the bubble burst, some of them got back to school to finish their degrees. A person in a student sauna commented that "sanity had been restored". This way, history has demonstrated the expectations for the marginal employee shift. Offshoring is a big threat for the marginal employee, because increasing the pool of workers means that more track record and skill can be expected from chosen workers.
Here are some predictions about political attitudes: Americans should be more concerned than Finns, because they have more to lose since the wage gap is wider. Seeing bidirectional subcontracting should reduce the fear of offshoring. Testers and less skilled programmers should be more concerned about offshoring and less sympathetic to the global advantages of indianization.
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