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How Comparative Advantage Affects Your Job

Comparative advantage is a principle in economics that explains how fair and free trade helps everyone involved and it’s an idea that I believe will affect everyone’s job, more than it already has, in the United States. Wikipedia has a detailed page explaining comparative advantage [3] but essentially the idea is that two people, groups, countries, etc. that are better at different things benefit from focusing on their strength and “trading” with each other.

Here’s a simple example. Let’s take two people, Jim and John. In one hour’s time:

Jim is a better fisherman, John is a better berry gatherer. It benefits both to focus on their strengths and trade for what they lack if exchange rates are favorable. What is a favorable exchange rate? As long as the rate is better than 1 fish for 10 lb. of berries, John will trade. As long as the rate is better than 2 lb. of berries for 5 fish, Jim will make the trade.

Let’s say the exchange rate is one fish for two pounds of berries. Jim can fish for an hour and then trade one of those fish for 2 lb. of berries. After an hour, he has 4 fish and 2 lb. of berries, which is 4 fish more than if he was bumbling around the forest looking for berries. Likewise for John, he can gather 10 lb. of berries, trade in 2 lb. for a fish and end up 8 lb. of berries ahead. Get the idea? We’re better off doing what we do best and trading for the rest.

So, how does this affect you or me? Outsourcing. There are billions of people outside of the United States and the reality is that the cost of labor is extremely cheap in many countries. A lot of corporate call centers are located in India because the cost of living there is ridiculously cheap relative to the United States. Why do so many products originate in China? Again, cost of doing business is much lower there. (Before you complain about dealing with Indian CSRs and poisonous Chinese products, remember that Americans love cheap stuff and ultimately it’s American corporations choosing to work with particular subcontractors, responsibility is on American companies)

How do you protect yourself? Find a job that cannot be outsourced. Easy to say, not as easy to do! What are some jobs that cannot be outsourced? These are jobs where the work products cannot be easily transported or not legally transported.

That’s comparative advantage in a nutshell, why outsourcing works, and how one can best protect themselves in these changing times.