Salaries are dropping. Time to celebrate!

So, the latest trend to hit the business magazines is falling programmer salaries. I can’t lay hands on the article just now, but it seems some CEO under pressure to outsource his programming to India had the bright idea of offering lower salaries (competitive with Indian levels, not U.S. levels) to programmers in the U.S. He got 90 applicants, even though the offer was for about half of what used to be considered normal for the positions.

A pointer to this article was posted to my favorite mailing list by a friend who is depressed about programmer salaries dropping, He wasn’t un-depressed by the revelation, at the end of the article, that said CEO ended up jacking some of his salaries back up to “normal” levels to keep his best people.

There are a bunch of ways I could respond to this. One is by arguing that outsourcing programming work is a fad that will largely reverse itself once the true, hidden costs start to become apparent. Even if that weren’t so, the Indian advantage would be temporary at best; as the Indian programmer’s value rises, so will the price he charges. I believe these things are true. But in keeping with tradition here at Armed and Dangerous, I’m going to skip the easy, soft arguments and cut straight to the most important and contentious one of all — falling salaries are good for you.

If you’re a programmer upset by falling programmer salaries, I hope you’re prepared to be equally gloomy about the continuing fall in real-dollar prices of all the other labor-intensive goods you buy. Because trust me, they get cheaper the exact same way — and somewhere out there, there are people who are pissed off and depressed because the market wouldn’t support their old salaries.

But each time this happens, more people gain than lose. The money programmers aren’t making is, ultimately, money some other consumer gets to keep and use for something else, because the price of the bundled goods programmmers were helping produce have dropped. The corporate cost-cutters only get to profit from this as a transient thing, until the next round of price wars. Lather, rinse, repeat.

The free market is a wonderful thing. I was going to call it the most marvellous instrument ever devised for making people wealthy and free, but that would be wrong — the free market isn’t a ‘device’ any more than love or gravity or sunshine are devices, it’s what you have naturally when nobody is using force to fuck things up.

Sometimes, when you and your friends are on the bad end of one of its efficiency-seeking changes, it’s hard to remember that the market is a wonderful thing for almost everybody almost all the time. But it’s worth remembering, just as it’s worth remembering that free speech is a wonderful thing even when it’s the Nazis or Communists exercising it.

Why is this? Because the alternatives to free speech, even when the people pushing them mean well, always turn into petty tyrannies now and become grand tyrannies in the course of time. The alternatives to markets decay into tyranny a lot faster.

32 thoughts on “Salaries are dropping. Time to celebrate!

  1. I’d say that the free market *could* be a wonderful thing, but I don’t think there’s ever really been such a beast — our current market has some free-ish characteristics, and those characteristics have their good and bad points… but there are too many protections and regulations in place (some that have good effects, some that have bad effects) to have a genuine “free market.”

    Then again, I am a pessimist.

    That said, I can’t find anything to really disagree on in your post.

  2. The problem is that you have a lot of fixed costs like health and educatio where costs are indirectly or directly supported by government. It means you may have a choice of paying huge propperty taxes and health insurance on a low salary, risk losing your property or move to a country where property and health costs are cheap.

  3. Nice argument…BTW, where have you been?

    With respect to the true programmers out there who do their best to write robust, scalable, tight code (whom I should mention AST believes are extinct) I offer the following: Thanks to Microsoft’s pile of shit with a pretty interface they refer to as a ‘development environment’ Universities, trade schools and certification mills have been churning out ‘programmers’ at an astonishing rate. This individuals, attracted by the high salaries prevalent in the .COM bubble, have little to no real interest in computers and their knowledge base is as deep as what they learned from the last episode of “The Screen Savers” on Tech TV. Now that the market is flooded with these fools who do things like use Visual Basic to write front ends for Access databases and think it will scale up and work in a large deployment with a few hundred simultaneous users. I have worn several hats in my short life one of which was flight instructor. I argued with my close friends that one of the reasons we were so successful in building a deep knowledge base of aviation information was because we talked about it constantly. We loved flying and therefore loved talking about it. Anytime a few of us got together the topic would invariably lead to something aviation-related. I propose that the difference between the flood of new ‘talent’ into the IS industry is of the type of students we detested as instructors. Individuals motivated by promises of high-salaries that do not share any deep love for computing technology and simply expect to take a few university courses and then land a high paying job. Juxtaposed to this is a real hacker as discussed in multiple pages on Eric’s home page. My father always said there was good money in any field for people who were good and eventually little money for people who were not. The .COM bubble and other events conspired to flood the labor market with the wrong type of people and a salary drop will do nothing more then motivate them to gravitate to the “next big thing” and get out of our hair. As an aside this argument explains why we see so many incompetent lawyers and doctors. To extend my pilot analogy we see few incompetent airline pilots because the barriers to entry involve more than ~$50,000, a few years of lectures and multiple-choice tests. I do realize that is a bit of an over simplification of post-graduate professional education programs but I believe my argument has validity nonetheless. While I’m on the subject I would like to advance the notion that the apprenticeship model much better prepares a young man for a career then our highly vaunted university system. Ultimately I believe the best programmers will continue to be well remunerated for their services. My father would say, “If you’re going to do something do it well; otherwise don’t do it at all.”

  4. Ok, the argument seems reasonable. But it only benefits me financially if my major expenses fall. And my rent/mortgage never goes down. Ever. In fact it goes up. Why? Because land is in the market as well and there is less and less land for me to live. It’s a scarce commodity. And because living somewhere a must-have commodity, the demand never goes down.
    Thus I am ultimately poorer for staying in the IT field with a lower salary. Regardless of how much you benefit from cheaper software.

  5. I have to take issue with your claim that the free market is what happens naturally when nobody is using force to fuck things up. Unless you define “naturally” and “using force” extremely broadly, there are a number of non-obvious social institutions that have to be figured out, implemented and defended to have a working free market. Hernando de Soto talked about this at some length in his book _The Mystery of Capital_.

    The free market isn’t a device, but it *is* a creation. Unlike gravity or sunshine, it has to be figured out, built up and maintained by a sustained process of human effort.

    Characterizing it as ‘what happens naturally’ trivializes the insight and effort that went into (and continues to go into) creating it and making it work.

  6. Eric – rents in Santa Clara County are falling. You might have to move to take advantage of that, since landlords really don’t like messing with the rent for existing tenants, but there are cheaper apartments available.

    There are 20 apartments, 2+br, =

  7. The market is a machine, and every machine needs a master. You’re a programmer Raymond, you know how often the system messes up and how often you need to get in there and fix it. The spenders and producers aren’t the masters of the machine, we are the machine. And this machine requires a master.

    And please, give this analogy some thought. Its valid, just don’t go lopping off strawmen so you can deny it.

  8. Christopher — we know that free markets are good because markets that a more free produce better results than markets which are less free. The proof is at the margin.

    Eric — land is a “scarce commodity” only because it is an economic good. Many things which are economic goods are nonetheless produced in profusion. For example, land used for housing is different than land used for agriculture. One can be converted to the other, though, as values change.

    Kevin — markets don’t need a master because a market is not a machine. Markets are made up of relationships. Does your relationship with Eric need a master?

  9. The CEO wasn’t cutting salaries from 80K to 40K, he was offering 40K and found people, some of them quite good, to accept it.

    “But it only benefits me financially if my major expenses fall.” Or if your major assets – eg, job – disappear.

    Oh, and “And my rent/mortgage never goes down. Ever. In fact it goes up.” Oh? When I bought a house, mortgage interest was over 13% so for 11-1/2 months of the year I was paying only interest. I recently saw an advert for “equity” (second mortgage) fixed-rate loans at less than 3%.

  10. You write “the free market isn’t a ‘device’ any more than love or gravity or sunshine are devices, it’s what you have naturally when nobody is using force to fuck things up”.

    This is just silly and wrong. What happens “naturally” is force, and lots of it. This is obvious if you look at the history of mankind.

    In reality, free markets are as unnatural as computers. (This is only a problem if you think natural == good.) David Brin makes lots of excellent points about this in his “Cheerful Libertarianism” speech, easily found on the web.

  11. Russell, relationships *may* need a master if they get out of hand. That’s (theoretically) why we have the police — in case someone decides that his relationship with me will involve some sort of violence against my person or people I care about.

    Some of this can be done by the people themselves (in fact, it would be much better if more was) but the problem comes up when one set of people pool their resources and target smaller groups. This can be done economically as well as in the world of human relationships. In fact, it’s done in the computer industry regularly…

  12. Eric, you raise a number of good points, but also the SPECTRE* of deflation. The Fed needs to keep a careful eye on such things. Prices and salaries correcting to their natural levels are all well and good, but deflation tends to be self-reinforcing and screws over economies fast.

    *MAD was cooler.

  13. You’d have made a good economist, or should I say, you are a good economist Eric.

    Additionally, as the price of labor falls, the return to capital goes up.

    I think some of you are misunderstanding Eric’s point. Certainly, in the short-run, if you are a programmer, falling salaries of programmers make you worse of, but in the long, free markets in labor make us all better off.

  14. When it was the blue collar jobs going through this process of dislocation and downward labor price adjustment, programmers benefitted but didn’t notice. Things just magically got cheaper from our perspective. Well, today, it’s programmers taking it in the shorts and other people are noticing that things are ‘magically’ getting cheaper.

    The solution, as always, is to really look hard at your career choice and if you’re not likely to be in the top x% that remain in the field in your local labor market, retrain quickly and go someplace else where you’ll make more money. Of course figuring out what is the value of x is always a challenge.

    We all would prefer not to have to go through the arduous process of picking a new career and retraining. But that’s just the way labor market progress works. 3 generations ago, we were in a huge population shift from rural farms to urban factories. Today we grow more food with a small fraction of the previous population devoted to that task. If you think that was comfortable or easy, read some history and guess again.

    Right now we’re freeing up labor for doing something else. Who knows what it’ll be but we’re likely to end up handing our kids a richer society for it.

  15. A general riff: I’m looking forward to the future where we run out of third world–where the search for cheap labor has led to wages/income being bid up in all the poor parts of the world. This will presumably also lead to a drop in wages/income in the richer parts, followed by steadily increasing wealth everywhere, due to an growing knowledge base and less waste of extraordinary talents.

    Oddly, most of the people who favor egalitarianism don’t like any of the intermediate stages, though I don’t know why they thought the world could jump immediately to a state where everyone gets the equivalent of a good American union salary.

    In the interest of goring everyone’s oxen, I’ll note that my dream future also has America not being anything special.

  16. You could always do what I did and ‘outsource’ yourself. Find out where the jobs are going, move there, and get a job. Sure, you’ll get paid a pittance by US/UK standards, but it’ll be a fortune by local standards. Plus it will probably be warmer (no snowstorms where I live).

  17. Housing costs can become cheaper–I just moved from Los Angeles to Fort Worth and my mortgage payment is close to half what my rent used to be (and twice the house to boot).

  18. We’ve spent the last 20 years or so automating processes and increasing our customers productivity while reducing their costs, including their labour costs. If you didn’t have any sympathy for the people that you put out of work, then I have none for you.
    And no, you don’t have to live in a $1M plus 3 bedroom apartment to be 20 minutes from work; as the man above said, outsource yourself. I haven’t gone as far as he did; I get less money than I would if I stayed in Sydney, but then I live walking distance to the beach in a 6 bedroom, 5 garage house, 20 minutes from work. One that I can afford.
    I do miss the face-face talking about computers, though – nuance via email or IM is not a easier as when you see the people you’re talking to.

  19. The things programmers make are not labor-intensive, they are *design*-intesive. Very little of the cost of a product that is or contains software depends on the salaries of the programmers working on it. This is really more like Ford going for cheaper mechanical engineers, not cheaper assembly line workers.

  20. “But it only benefits me financially if my major expenses fall. And my rent/mortgage never goes down. Ever. In fact it goes up. Why? Because land is in the market as well and there is less and less land for me to live. It’s a scarce commodity.”

    And there’s less and less land for you to live because conversion of land to residential use is restricted by government fiat.

    “Right now we’re freeing up labor for doing something else. Who knows what it’ll be but we’re likely to end up handing our kids a richer society for it.”

    Well, it would help if every potential “something else” were regulated to the same extent as programming was (i.e., not very much).

  21. Just a thought, but perhaps one advantage of dropping salaries is that we will see less of the “get into IT to make money” crowd. I’ve meet quite a few over the years with this attitude and they can’t program to save themselves. But they know how to sell themselves and consistantly get work anyway. I consider them highly destructive because they do damage to the reputation of software developers as a whole. Any I’d much rather be paid to write new things than clean up their messes.

  22. Pingback: rob's blog

  23. Laissez-faire is a great thing…but this is not what we have (either in the US or Canada). What I’ve noticed we have is faire laced with regulations, laws, and other corrupt socialist bungling.
    This is most abused by the software (copyright/patent/trademark abuse), auto (patent and regulation abuse), insurance (political/legal abuse – mandatory insurance), drug/medicine (patents and copyright), communications (patent and regulation abuse), and media (copyright abuse) industries.
    It’s funny to that after most passionate open-source advocates are done trashing Microsoft they use the auto industry as an example of choice…and I guess that when you’re enveloped by a monopoly even a trust situation starts to look good :- )
    Hate to say it but the only difference between communism and fascism and where we are at now is that communists and fascists didn’t think that De Nial is a river in egypt…

  24. Your agurement is great when assuming that prices will drop. However, what happened when prices consumer pay stay the same? Then who wins? Only the stock holders. Increasing the returns for the stock holder is the only reason for outsourcing.

  25. Yes, yes, it’s true. The free market is great for all of us in the long run. But, to paraphrase a famous economist, in the long run we’re all dead.

    With trade liberalizations there are winners and losers. The role of government is to help the losers through retraining, relocation and other programs to help workers and businesses cope with the changes brought by free trade.

    The paradox of thrift, in this case when all companies cut costs and the economy suffers, is part of what caused Japan’s current problems and its bout of deflation.

    If our economy is allowed to implode, a world that depends on the American consumer as its engine of growth will surely suffer. That includes India and China.

  26. I can’t argue with your remarks on tyranny and the efficiency of markets. But here is what has always bothered my by this libertarian approach: Free markets are efficient in the same way that evolution is efficient. Production will flow to the places most fit to produced a product with maximal cost and quality value, and overall, total wealth should increase. But, as with evolution, you have losers — jobs, lifestyles and individuals that go extinct because they were not able to adapt. Now, all the factors in the ability to adapt are not in the individuals control. That is what worries me about the current U.S. economy.

    The American middle class has just barely kept their living standards over the last 30 years due to the increased prevelance of two-income households. Real wages on an individual basis have dropped. Why — because much of our manufacturing base, and the accompanying wage wealth was transferred overseas. Yes. goods are much cheaper for all now, but the wealth and opportunities available for middle class Americans like myself are diminished.

    It is not a zero sum game to be sure, but neither is it all win/win — the competative market place creates losers — and it seems that the American cost disadvantage is too great a barrier. As world wide markets free up and labor migrates to the most efficient providers, most Americans end up being losers — as I think we have been very gradually over the last 30 years. I fear there being a continued, maybe even accelerated slide and a substantial diminishment of our real standard of living before things turn around on a global basis 50 years from now.

    I don’t see this as a great occasion for celebration.

  27. Looking at a bigger picture:
    (Disclaimer: I am not an economist, and I am here arm-waving just as ESR does)

    - Wallmart prices go down (paying $1 at Wallmart instead of $2 at Joe’s).
    - the $2 would otherwise go to a small local businessman, his local staff, and his local suppliers.
    - the $1 now goes to millionaires who own Wallmart, to Chinese (increasing our national debt), and to $7/hour local staff.

    Globally, the standard of living in China is rising for almost as much as the standard in the US is falling.
    - That is bad for people in the US.
    - That is good for Chinese.
    - Overall, it is worse than before because a portion of the money concentrates at the hands of billionaires which is not good (think Rockefeller, Carnegie, and the Great Depression)

    Does this make sense?

  28. “the Indian advantage would be temporary at best; as the Indian programmer’s value rises, so will the price he charges”

    The value of the Indian programmer is at the same level as that of the American programmer … the point that u seemed to have missed is that the cost of living here is low compared to the cost of living in america and the cost that the indian programmer will rise only if the cost of the living rises and thatIMHO will take some time .

  29. The west’s programmers need to do one of five things to adapt as this “free market” becomes extreme:

    (a) Create a house of cards – Lobby for government subsidies to support an ailing domestic IT industry. The west’s farmers have been at this for years. Sure it messes with supply and demand curves and makes the crash bigger in the end, but it keeps the party going !!

    (b) Exterminate free trade – Lobby for protectionist tariffs on the import of foreign intellectual capital. Argue that western programmers pay their governments lots of money to support social welfare, dictator removals, farming and oil subsidies, etc. and programmers there don’t so their output should be tariffed outrageously, or at least in line with their competing level of social contributions (ensuring our governments will safely never have to “compete” on levels of social contributions, except through the current election-fiction mechanism).

    (c) Play the free trade game – Lobby to slash taxes, social policies, education & healthcare, infrastructure development, cushy for-life massively-pensioned public service jobs, dictator removals, 3rd world development aid grants, etc etc. so at least there’s a level playing field. Lobby for fiscal policy aiming to have your local currency reduced to half a rupee’s value ensuring your country’s domestic economy needs you because it can’t afford to import anything coded by those suddenly expensive people in the developing world. Marvel as your exports grow as fast as the numbers of starving children in your streets.

    (d) No, I mean really play it – Lobby for the total removal of the concept of citizenship from your country. 3rd/Developing worlders who want your society’s infrastructure perks will be free to relocate en masse, and hey presto, you’re all on the same salaries now (though I can’t promise rent or land costs will go down, except in the less-developed world).

    (e) Leave the industry – and join a new one in an earlier stage of the globalisation cycle. Run a book with your new colleagues on how long it takes you to face this choice again.

    The choice is yours colleagues. No one of these options is going to work in isolation though, are they ?

  30. The free market is a wonderous thing indeed, even though American programmers are currently at the short end of the stick, but it’s important to realize that cost cutting is not a one-time payoff for big muck-a-mucks that in the end results in a compensatory reduction in prices. Instead, with each cost cutting, profit making measure, they take a bigger cut. Just check out income inequality stats, especially top 1% vs bottom 99%. All they’ve done for a very long time is go up.

    The big muck-a-mucks, being big muck-a-mucks, decide among themselves how much they make. Who really has the humility to pay themselves only what they’re worth when they can get 5-100x more? Almost nobody. Now of course, that amount never goes down, for all the reasons American programmers don’t like to see their salaries go down, except the list of must-haves becomes much larger and sillier. That, and ego… so even those who clearly will never have to work again to support even the most ridiculous lifestyle won’t cut their salary and bonuses, because that would be like an admission of defeat. You would think that competition might correct this, but human nature is too consistent, sorry.

    The great majority of those that are already rich and powerful do anything other than get while the getting’s good. Even if they inflict a lot of damage on their company, they’re doing fine financially, and can usually land a CxO position again. The same thing repeats in less dramatic fashion for those not at, but near the top of the scale. It’s not what you know, but who you know, and even when there is no personal connection, the thing which shows up prominently on a resume are job titles and responsibilities… performance is generally impossible to quantify, and the answers to many questions about performance are protected by NDA. As long as someone likes you they’ll say you did a good job.

    Advocate laisse fair economics ignoring the unavoidable cronyism, ego based inefficiency, and (often) hollow suites and you quite rightly make yourself sound clueless.

    There’s no perfect solution to job churn and how disruptive it is in people’s life, especially when someone has to start from scratch in a new field, but you can and should reduce the burden of government on these folks when they are working, so they have more of a chance to create a cushion for themselves, by reducing their taxes (making up for lost revenue by taxing the rich and super-rich more heavily (hopefully this also has a partially corrective effect on the distortions I identified)), and make it easier for them to start anew by subsidizing their retraining.

  31. We need to tax the rich so heavily that they leave the country.

    Then they will do their damage elsewhere.

    It is true we will have to find another target for our envy but that isn’t too hard. We still have politicians.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong> <pre lang="" line="" escaped="" highlight="">