Are Global Online Labor Markets Truly 'Flat'? Global Frictions and Global Labor Arbitrage

Abstract

Visionaries have conjectured that the world is becoming a level playing field due to the Internet that allows people to connect from anywhere around the globe. We examine this “flat world” conjecture in the context of online labor markets by theoretically proposing and empirically quantifying the economic effects of a set of common global differences (language, time zone, cultural, and economic development differences across countries) on both employers’ hiring decisions and service providers’ pricing decisions. The empirical study integrates a unique dataset formed by a sample of 261,060 bids for 25,839 IT projects (software development) from a global online labor market matched with five archival sources on language, time zone, culture, economic development, and exchange rates. We quantify the role of global differences (“frictions”) in terms of the employers’ price elasticity and the service providers’ level of sensitivity to these differences. The econometric identification hinges on the exogenous variation of the exchange rate fluctuations of global currencies against the US dollar, as a “cost-shifter” type Instrumental Variable (IV). The results show that employers are negatively affected by global differences; notably, on average, a different language reduces an employer’s utility by about 5%; each hour time difference decreases the employer’s utility by about 0.71%; while a different culture reduces the employer’s utility. Contrary to the literature and industry expectations, controlling for compensation, employers prefer service providers from countries with higher economic development. On the other hand, when submitting their bids, providers are sensitive to language and time zone differences, but not to cultural differences. The strong economic effects of the proposed global differences imply that online labor markets are not a truly level (“flat”) playing field, particularly for service providers from poor, non-English speaking countries with traditional (religious versus secular) cultural values and a large time zone difference from employers’ geographical locations (predominantly North America and Europe). We discuss the study’s theoretical and managerial implications for reducing the “frictions” from these global differences and designing “flatter” online labor markets.