if a company can move some operations even 50 miles away from a high price place, then why not move them to the cheapest feasible place?
…If a job doesn’t have such distance-limitations regarding interactions with other humans, it will immediately be outsourced from high wage counties to the cheapest place.
If your company needs to plug into a specific talent pool, you want that talent pool close by. If your company can use just anyone, then the lowest-cost place to locate is not a cheap American city but an even-cheaper foreign city.
I don’t think this quite gets at his point.
Why can’t Google tap into a talent pool by locating within 50 miles of a world city, rather then downtown. The price differential between downtown and the suburbs of these cities is immense. Not just to the company, but to the real wages of its workers (who spend a lot of their extra compensation on rent).
There must be reasons why companies are willing to pay these extreme prices for super prime, rather then just prime, location. Some will be legit. Some will be illegitimate. Some will be best of bad options solutions to problems that probably make us all depressed to think about.
Look at Texas, and Dallas area. Lots and lots of relocations because of lower cost of living in Dallas. Now I am from Oklahoma City, and an even cheaper cost of living in Oklahoma City. But you have a lot of people who will relocate to Dallas but will not move to Oklahoma City. Plus Dallas has major airport.
Any discussion on this topic should at start with discussion of Texas and how offering a cheap business location has caused Dallas to boom.
Hmm. I don’t think life is so rational.
Microsoft is in Seattle because Bill Gates was born there.
Walmart is in Bentonville because it’s close to Kansas and Oklahoma, thus providing Sam Walton with three distinct quail hunting seasons.
Charlotte is a banking center because it’s where the guys who founded BB&T lived.
Salt Lake City is thriving because Mormons have displaced Episcopalians as the tribe to beat. And they have lots of babies.
Lightning can strike anywhere, though admittedly it’s more likely some places than others.
Certainly the current geographic distribution of various economic and population centers are matters of important, if somewhat arbitrary, historical contingencies. But:
1. For reasons related to the tremendous difficulty involved in social re-coordination, there is also a tremendous amount of inertia once a city becomes an established (though not necessarily exclusive) hub for a region and/or sector. E.g. Wall Street, and
2. This time is different. IT, automation, and global commerce and transportation has never been so powerful, fast, competitive, and/or cheap. In the past, agriculture, natural resource extraction, commodity production, and manufacturing employed most of the workforce. That created incentives for geographic decentralization, especially during the period of westward expansion and homesteading. Since land was still the most important form of labor-complemented productive capital, and its cost was nearly free on the frontier, people spread out. That provided a lot of opportunity for all those arbitrary founder effect moments.
But now those sectors only employ a small and shrinking portion of the workforce because of technological and economic change. That means the hinterlands are being emptied of their populations, and those people are being concentrated into established hubs. So we aren’t getting these “founders establishing sectoral hubs in some new place” stories anymore.
Instead we are seeing the opposite. The mountains no longer come to Mohammad (that is, agglomerations forming around where he happens to be when he sets up shop) and instead, all the Mohammads are moving to the biggest mountains (where the hubs already are).
“If your company can use just anyone, then the lowest-cost place to locate is not a cheap American city but an even-cheaper foreign city.”
It’s not as simple as that. Often your company can’t use just anyone. Cultural barriers matter. Language barriers matter. Even time zones matter quite a lot (it’s impossible to schedule a phone meeting during working hours in both California and India, and California and Europe isn’t much better).
A common pattern is that companies dip into multiple talent pools in the U.S. Here, for example, is where Google’s offices in the U.S. are located:
https://careers.google.com/locations/
Somehow Google finds it worth its while to set up offices and hire talent that A) isn’t near it’s world headquarters but also B) isn’t located in the world’s cheapest cities.
This particular example of the need for for elite technology companies to recruit from a scarce supply of highly skilled people is missing the forest for the very tallest trees. Only the top 10% can do top 10% jobs.
Look at the bigger picture. Most workers in developed countries don’t have scarce skills. They are much more interchangeable with their competitors: cheaper workers abroad and increasingly capable automation substitutes.
Either their wages succumb to factor price equalization and fall to the much lower level of the competition, or those jobs disappear from the local scene, and these people must find something else to do. That’s exactly what’s been happening.
In the long run these interchangeable workers can only continue earning higher wages than their counterparts abroad if there is some protectionist government distortion that creates a barrier to entry, restricts supply, and insulates them from this competition.
At present that distortion is called “regulated borders” with limits on immigration.
But this distortion can’t do much to boost employment in sectors that trade goods or remotely-performable services. You would also need state-imposed tariffs or quotas or some equivalent trade intervention.
And so, with historically low barriers to trade in most goods, restrictions on immigration mostly serve to boost wages and employment in certain kinds of services: those that are hard to automate and which must be performed close to the customer.
Bur why do we have any industry left? I think we can lower the costs because the net margin must be closer than we think.
As one of those entrepreneurs creating jobs out there, this doesn’t match how I’ve grown–we started with two big coastal cities for presence, then started expanding in the interior for access to lower cost but still skilled-enough labor. While the unit cost of labor in Manila would no doubt be lower than in exurban Colorado, the sunk costs (particularly in time) to establishing international offices are, in my experience, far higher than domestic ones. So for a smaller company like mine (~100 people), staying domestic makes sense where a larger company could easily afford the sunk costs.
What are you selling, and what is the nature of work being performed by your employees?
The flip side of this is the “talent” wants a pool of employers to work at. As many of the more “talent-oriented” companies tend to have fairly high turnover – both among employees and companies as companies start up and fail – it’s dangerous for an employee to relocate to a “talent-oriented” company that’s isn’t near any other employers.
The demand works both ways – and is sticky both ways – which is why creating, say, a new tech hub is so hard to do.
The increase of women in the workforce adds another factor to your equation (which I agree with). Not only do people want jobs for themselves, but for their spouses, as well.
I agree with foobarista – a company’s employees want options, and that requires being in a city with other companys who desire that employee’s skill sets. I started the US operations of my tech company in Reno, NV. Engineers from the bay area loved the idea of moving to NV – zero state taxes, drastically lower cost of living, wonderful outdoor environment, but universally said, “What about my next job? What else is out here in Reno?”. I’m in Boston now, and recruiting is easier despite it being an objectively worse city.
The current pattern is really not god given. All of this centralization is happening in the context of 3 things.
1. The greatest taxation burdens being central themselves. Income tax, corporate tax, goods and service tax, all of these taxes are the same where you are in prime-alpha-city or nowheresville. In the light of this, what incentive is there to move to nowheresville?
2. Corollary to (1), cities are not run like profit making entities. Cities compete in the most minimal way in giving incentives to corporates. If they were run like profit making entities and their long term employees had real skin in the game, they would be a lot more careful in trying to arrange good working conditions everywhere. eg. instead of being paid defined pensions, pensions of all city workers were given out as strict fractions of the city revenue. I can envisage a city engaging a consultant to simultaneously try to bring 3-4 top tech firms to establish an office in their city, but this would require true entrepreneurship.
3. Insufficient maturity of the coordination mechanisms – Maybe tomorrow’s equivalent of the free-state project/charter cities could be a proper linked in group where people can quite literally call out for all sorts of talent that they want in a city. This group could take over small towns or build new cities on empty land with finance coordinated with dominant assurance contracts enforced by blockchain like trustless/minimal trust mechanisms. All of these mechanisms are still immature. Maybe someday when the costs of the bay area really go up, the next big tech firm could try this.