Factor-Price Equalization

Related to my previous post on the decline in labor arbitrage in the tech market, it's worth studying the data supporting factor price equalization in this age of greater factor mobility.

Per Arnold Kling:

Again, I want to suggest that there is a connection between this trend and the stagnation of median incomes in the United States, and even to the decade-long drop-off in employment here. New patterns of trade are developing that are reducing the advantage that a person enjoys merely for being located in the United States. There still are advantages, as evidenced by the excess supply of people who wish to immigrate herte. However, the Great Factor Price Equalization is underway, thanks to the fall of Communism, the rise of the Internet, and sporadic progress in institutional development in the emerging-market countries.

Some of the most compelling evidence for Factor Price Equalization comes from Evan Soltas. In the early 1970's, something changed in the U.S. Up until then, "real wages and compensation had increased roughly one-for-one with productivity; since then, productivity has soared with comparatively no change in real earnings".

Taking the U.S. apparel market as a case study, Soltas goes to show convincingly that almost all apparel manufacturing fled to Asia, with corresponding spikes in trade to GDP, exports, and wage increases in manufacturing in Asian markets, all of which factor-price equalization would predict. The charts over at Soltas' post are damning.

Here's further evidence from the Conversable Economist. A World Bank report calls our current age, from about 2000 onward, the Third Age of Financial Globalization, and charts on both investment and savings show convergence between high income and developing countries.

Something like this is happening in technology, though it will be quite some time before wages between tech workers in Asia and the Bay Area come anywhere close to being equivalent. Even with the existing disparity, though, Chinese developers working for American companies are seeing their wages outpace those of their in-country peers at a dramatic pace.

Within the U.S., it's not a coincidence that so many companies in tech offer similar benefits and perks now: a liberal vacation policy, free food and drink, your choice of computing equipment, the ability work from home when desired, a lax dress code.

When skill converges, luck becomes more important. When the offer numbers and perks converge, getting an edge on recruiting and retention depends on other factors.