Empiricman on Productivity

Reader Empiricman sends this quetion:

I have been following your Democrat-Republican threads at Angrybear and have an entirely different economic question I thought you might be able to clear up for me.

I understand offshoring and outsourcing are generally forces to increase US productivity but I am having trouble seeing the mechanism in high-skill occupations.

As I understand, most jobs offshored are generally replaced by 2 low income workers (isn’t this lower productivity?) at 1/3 the cost. Then added technological costs only allow companies to recoup 1/2 of their wage differences (again, lowering productivity?). The displaced worker usually takes a job at 2/3 the old wage (once more, lower productivity?). Although the numbers may not be exact in every case, the trend seems to generally be true that low-income workers tend to be less productive, additional costs are introduced, and displaced workers find less productive jobs.

I can certainly understand how the company has an advantage with lower costs but this looks entirely like wealth redistribution (from the worker to the company & customers) and almost no productivity gains. I must admit, there is certainly a productivity gain from the low-income workers, who previously probably held even less productive jobs. However, since most of those gains should be retianed by the foreign country, doesn’t the US bear all of the productivity losses? Isn’t the only gain in the US simply redistribution?

Taken another way, there is a common instance of offshoring I have seen in IT. An H1-B worker earning $80K is often fired and rehired in India for $20K (although he will be lucky to receive $15K). Since there are certainly efficiency losses and infrastructure hindrances, the worker is generally less productive than before. Since this is the simplest outsourcing example, how can there be any economic advantage to this situation? All we have done is add waste and redistribute the worker’s wealth to the company. I also use this example because it is quite common and I know many Indian workers who are rightfully very angry with such practices.

From the studies I can find, they seem to always say productivity is gained because the company produces just as much as before (with a little extra profit) and the fired worker can work at Walmart, adding a little more to the economy. This seems to be ignoring the lost wages from the employee (and the foreign worker’s old job), as if those were not output in any sense.

Am I mistaken?

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cactus here. I could be wrong… I think this is more of an accounting issue than anything else so I’m way ignorant here, but let me try to reason this out. Say its the year 2000, and PWC or some other big accounting firm is able to provide $1,000 of output using 1 hour of partner labor and $400 worth of output from the folks below.

Now, say its the year 2007, and they can produce the same $1,000 of output using 1 hour of partner labor and $50 of output from the folks below, who happen to be in India.

There’s $350 floating around in “productivity.” Who gets it? I would imagine the partners at PWC would tell you that it accrues to them for a few reasons:

1. I imagine the $350 goes to the partners at PWC, not to the folks in India or whoever else
2. The partners would argue that it was their innovation or leadership or mad leadership skillz in recognizing a way to save $350 that is the source of the productivity

Comments on Empiricman’s question?