A remote dev working for a Bay Area company from Spain can be just as productive for his employer as one located in Los Gatos, CA. However the above method would categorize this dev as "objectively less productive", which seems counter-intuitive...
It wouldn't, it purports to explain the differences in local salaries, or more precisely salaries paid by local entities to on-site developers.
It's true I didn't specify that explicitly in the first comment, along with definition of productivity, so your reading of it was a reasonable understanding. It's a good thing you helped me clarify the intended meaning.
One assumption is that foreign demand (for non-local use) for local on-site developers is small enough to not change the workforce demand significantly. So it won't work for India or other common offshore destination, but it seems to explain pay differences between USA and Spain, Norway and Switzerland reasonably.