Thursday, April 26, 2007

Salaries and the Effects of Competition

Do you wonder if you are making the right amount of income for the job you do?

I think just about everyone thinks they are underpaid, under-utilized, and under-appreciated. It's part of the human condition.

In the articles I read the other day about the H1-B quotas, there were some letters written in response, and most were from people in the IT industry who are upset because they are not making as much money as they used to make in the 1990's, and they feel this is due to the foreign workers here on H1-B's.

One letter in particular caught my attention. It was from a very angry young man who does C# programming for a living. He points out that he runs his own business and is making between $30K to $35K per year, but that he gets unsolicited offers all the time from headhunters offering him $50/hr which translates to $100K per year, but he refuses because he says that ten years from now, $100K will mean nothing.

Well, that kind of broken logic and flawed thinking makes me wonder how good his programming skills are. It is completely non-sequitur. And it is an emotional response. He can't seem to see that $100K NOW is better than $35K NOW and that 10 years from now, both may be higher.

But quite aside from that, he talks about how he is making $35K/yr as a programmer and yet truck drivers make over $50K. And why should C# programmers make only slightly more than driving a truck? He invites anyone to open a book on C# and on AJAX and tell him that that stuff is easy. Tell him that that is anywhere close to the simplicity of driving a truck. So why does it only pay slightly more on average? He blames H1-B's for this. Since employers can hire people from other countries to come at a lower salary to do the programming work, then they don't have to pay him more. Furthermore, he has a girlfriend who is a lawyer in another country, and she says that $30K is a lot of money in her country. So he is fed up with the US and is moving to her country. He says that here in THIS country a lawyer would not go out with a programmer anymore because there is now too much of a class difference. They just don't make enough money to interest a lawyer, despite the fact that being a programmer is every bit as complex and intelligent a vocation as being a lawyer - in fact probably much moreso.

Well, there are several things wrong with this whole mindset and his whole argument. Let's just list them quickly:
1) He is not limited to $30K per year. He already said that he has had offers of up to $100K
2) He seems to think that a job should pay according to how difficult or complicated it is. Tell that to professional baseball players. They play a simple game that 8 yr old kids play, but they make more money than the political leaders that run the country - an order of magnitude more. Income is NOT tied to complexity of the work. Look at schoolteachers. Look at musicians. The list goes on.
3) He blames income inequality for keeping men and women from being attracted to each other. He must just not get it if he hasn't seen exceptions to this in his life so far. Plenty of couples have one working and the other doesn't work at all.
4) He seems to think that programmers should make far more than truck drivers. Now THIS is the most interesting thing to talk about here, I think. This is where I want to make a point.

He is laboring under some delusion that you should be paid according to how complex a job is. What he apparently does not understand is that job salaries, like every other aspect of the economy, may flow up and down according to the laws of supply and demand. If there is more supply than demand, then the price goes down. For example, if there are too many people doing shoe repair, then people charge less and less to compete for a shrinking number of customers and so the overall income of shoe repair people goes down. This is the same for every type of work.

Right now, in my area, it generally costs about $30/week for someone to cut my grass for my house. I actually cut my own grass now, but I used to use a service. If suddenly twice as many grass cutting services enter the local market, then they have to compete to get the work. That means they have to cut prices or provide some other incentives to get the business - like trimming the bushes for free, or doing the weed & feed after cutting, or whatever. essentially - they provide more value for the money either by adding services, or cutting prices. Let's say that the cost of cutting my grass goes down to $15 this way. Now, suddenly the same people who used to work full time at the old rate, are still working full time, but only getting half the money. That starts to make it difficult for the grass-cutters to make a living. They are earning much less money now. So, predictably, they begin to leave that market. They either go elsewhere to another market where there are fewer grass-cutting services, or they switch into a different business that is not so competitive. Once the number of competitors drops again, the prices for the services again rises to meet the demand. That is the so-called "Invisible hand" of the economy that Adam Smith (the founder of economics) talked about in his famous book "The Wealth of Nations" over 200 hundred years ago.

That is the law of supply and demand in a nutshell.

In this case, we have a programmer complaining that there is too much labor supply brought on by the additional H1-B workers in the local economy and that is why he cannot make his $150K to $200K per year that he apparently expects to make in order to be on par with the average lawyer, rather than earning a salary that is more on par with a truck driver.

The problem is not so much that there are a few H1-B workers in town that can do the work. It's that programming is something that can now be done anywhere in the world. If not done by him in California, then it can be done by Michal in Poland, or by Ramesh in Bangalore, or by Chai in Shanghai. They have computers too, and are also on the internet. Suddenly, they are in his backyard so to speak. In other words, they are his competitors for the work he hopes to do. If he is competing with them, he cannot afford to charge MUCH more than them for the same work, or else employers will simply go to them. And they do - in droves. That's why there has been such a huge rush to use offshore outsourcing, or offshore globalsourcing (that's where the company doesn't give the work to an Indian company, but instead opens up an office in Bangalore and hires the Indian programmers locally there, so they are shifting the work to the cheaper workers in that country, but not giving it outside the company.)

But the truck driver doesn't have that same pressure, does he? His work is local, by definition. Specifically, a truck driver in Sacramento is not competing with a truck driver in Calcutta to be able to take a load of peaches to Boise. So his competitors are only the other local trucking companies. You can train someone quickly to drive a truck, and therefore the so-called "barriers to entry" of that vocation are low - however, companies cannot outsource it to people that live in a cheaper economy and therefore can live on a MUCH lower salary.

So therefore, the truck driver has a smaller competition base in his market space, and the competition have to live and eat in the same economy as he does, so presumably they need about the same amount of money as he does to eat, therefore his salary stays roughly the same.

THIS is why truck drivers make almost the same money as computer programmers. It's not about who is smarter or which job is more difficult or more complicated. It's just about supply and demand. Who's job is more local, and therefore has less competition. People that do construction, home repairs, plumbing, electrical, etc. all need to be physically present and so they don't compete overseas for business. They only compete locally with other people who have to live in the same economy and pay the sames prices for food, clothing, and housing as them, so they are somewhat protected.

This is a one of the reasons that I have encouraged my daughter to go into medicine and become a doctor. She wants to be a surgeon. Lab analysis can be outsourced to India, but not direct hands-on surgery.

Of course this effect propagates down. As people here figure this out, then they will all want to go to local-based skills and services, and that will increase competition locally, which also starts to drive down the cost of salaries again. After all - it's all about supply and demand, right?

I think as awareness of this global vs local market phenomenon grows, there will be more consideration of this as the kids make their choices in school courses.


At 4/27/2007 8:00 PM, Anonymous igor said...

I wonder, Val, did you explain that to the C# guy and how did he take it?

At 4/28/2007 12:18 PM, Blogger Val Serrie said...

No I didn't tell that to the young C# programmer. It seemed from his manner that explaining anything to him would be a waste of time.
He was simply too emotionally attached to his position, and the contradictions in his arguments told me that he does not think things through very well.
He wasn't looking for truth or wisdom or sanity, or a solution.
He was merely looking for an opportunity to complain.
So I just let him have his moment to complain.


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