Reply to retiarius laboratories

In a global economy, why would an engineer accept less pay just because she is in India, China, or wherever?

Tom Lehrer, who did not leave an email address for me to reply, commented on my blog recently.

It is such a good question.
Three factors:

• Relative income: the lifestyle one can afford depends largely on the income difference to the rest of the society. Simply put, an engineer earning 10 times the average income in China has a higher purchasing power and social status than the one merely 5x GDP per capita in US. Even if the latter earns 3x more in absolute terms.

• Saving rate: where will one live when retired? How much money does she need? How long would it take to accumulate that amount? These appear simple and straight-forward. But for the mobile professionals, they essentially face the famous 4 corner decision: where to work (high/low income regions) and where to retire (high/low living cost regions) and should choose the corner that offers the fastest rate.

  Without doubt, saving where income is high and retire where the costs are low is the best choice. But which is the 2nd best choice? Most people found the “low/low” corner more attractive.

• Market barriers: many factors prevent a mobile professional to move. The cultural and linguistic skills are the most obvious ones. That software engineer is highly professional, but cannot deal with American society for whatever reasons.

There is always the last reason of market efficiency. The difference in labor costs creates an arbitrage opportunity for those who will exploit it. Companies do this all the time. They will continue to exploit until the arbitrage disappears. Labor market is usually not very efficient and takes years to catch up.

Edit on 6/12:

Change the title of the blog. Thanks for the comment that lead to it.