Tuesday, October 18, 2005

      Value, Not Low-cost Is the Determinant Factor In Employment

Many people lament that the outsourcing trend to low-cost countries like India and China is depriving people of their high-paying jobs.

However, it seems that many have over-emphasis on the cost issue, that it hides the underlying factor of consideration - value.

David Ricardo's (1772 -1823) concept of "Comparative Advantage" states that production should be left to country that is best at production of a product/services most effectively. In this regard, labor cost is a factor of production that is considered. However, beyond cost, other factors of production have to be consider also. Like what is the value of production per unit of labor (i.e. productivity)?

If one worker in China costs $1/day, and produces 1 shoe in a day. That equals to Value of 20 shoes for $20 in wages in a man-month. C0nversely, if one worker in USA costs $2/day, and also produces 1 shoe in a day. That equals to Value of 20 shoes for $40 cost in a man-month. It's a no-brainer that I will employ the Chinese worker to maximise my profits. Under such circumstances, cost is the determinate factor in employment.

However, if the USA worker is able to produce 4 shoes in a day, that equals to Value of 80 shoes for $40 in wages. Notice although the wage cost stays the same at $40/month (which is higher than Chinese worker's $20), I have now quadrupled the production and hence can command a higher revenue by selling more shoes.

This is a very simplified example, but it underlines that it is Value and not cost that employers are looking for. Such value can be achieved by higher effeciency in production and productivity brought about by skills, knowledge or usage of machineries, automation etc. That is the reason why the Singapore government is encouraging people to go for re-training and to move up the 'value-chain'.

This argument is verified in a recent article that I read; Various CIOs were surveyed on outsourcing trends and their factors of considerations. A majority surveyed ranked "value-added services" higher (as a main factor of consideration), than factor like cost.


Blogger icelava said...

And therefore it becomes rather scary that most people, at least in Asia, stop at only that first level of mathematical calculation when making decisions. Amazing (in a really negative sense) isn't it?

8:36 AM  

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