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Why Do High-Tech Workers Earn More in Houston Than Hyderabad?

January 10, 2013

Why Do High-Tech Workers Earn More in Houston Than Hyderabad? (PDF)

Source: American Economic Association

Why do Indian software workers employed by U.S. firms earn more in the U.S. than in India? There are several possibilities, among which is the pure effect of location on workers’ economic product. This study seeks to isolate the location effect from other effects in a single setting via a natural experiment: a randomized allocation of temporary U.S. visas among one group of Indian software programmers. In this setting, outputs are close to perfectly tradable, workers in the U.S. and India are observably and unobservably identical in expectation, effects like Baumol’s cost disease and cost-of-living compensating differentials are less relevant, and some of the plausible effects of place on productivity (such as access to technology) are identical for both groups. The large majority of the earnings gap remains, suggesting that these workers are several times more economically productive solely due to working in the U.S. rather than in India. This effect is measured for a single firm and external validity is circumscribed. Further study of the effect of location on economic product has implications for the economic gains to migration, trade, and technology transfer.

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