Sunday, January 23, 2005

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More equilibrating mechanisms at work

One of the mantras of critics of offshore outsourcing is that countries like China and India have such large pools of low-cost, high-skilled labor that their wages will never rise enough to stop the flow of outsourced activity to those locales.

Siddharth Srivastava files a story that suggests otherwise:

India has shown the highest average salary increase in the Asia-Pacific region during 2004, beating China, Korea and Japan, according to a survey by global human resources firm Hewitt Associates. Analysts are worried, however, that such high increases in wage costs may result in the exit of business that is sought in this country for the very same reason — low overheads. What is particularly worrying is that the highest rise in wages has occurred in the Information Technology sector where India bids to be the number one player in the world due to a combined advantage of low cost and high quality manpower at its disposal. Combined with the news that the rupee has appreciated in the face of a depreciating dollar, IT firms that rely heavily on export revenue fear a resource crunch.

According to the report, India showed the highest average salary increase in Asia followed by China, Philippines and Korea. While India reported an 11.6 percent overall pay hike, in China salaries grew by 6.4-8.4 percent, 7.4-7.7 percent in Philippines and 6.4-6.8 percent in Korea for the year 2004, the survey said....

What is worrying analysts in India is that the IT industry in India witnessed the highest average salary increase at 14.5 percent though as many as 89 percent of participating companies linked salary hike to performance ratings. The rising wages coupled with an appreciating rupee in the face of high U.S. fiscal deficit and the no-tax promise by President George Bush to plug it, will end up eroding the basic comparative advantage that India enjoys vis-à-vis other low cost centers of the world such a Vietnam, China and the Philippines, which are beginning to focus on the software sector. In an interview, Vivek Paul, vice-chairman and president at Wipro’s global IT arm, has warned of an end to the low-wage culture that has been at the heart of India’s software boom.

posted by Dan on 01.23.05 at 11:06 PM


On to Burma!

posted by: The Lonewacko Blog on 01.23.05 at 11:06 PM [permalink]

I'm no expert in this arena, but it seems to me that so long as it is significantly cheaper to hire the same (Indian) software guy in Bangalore as it is in Boston or Silicon Valley, Indian IT will remain a strong and growing force. The rise in cost over there would reflect (among other things) a healthy rise in investment in infrastructure that will sustain this industry long term, and that will still represent (along with the inexhaustible supply of fluent English--American English!--speakers) India's main competitive advantage over China, Vietnam, Burma (!) et al.

It's good to see that no one is complacent over there, but I don't see an immediate threat to India's position as America's IT outsource venue of choice. If anyone out there knows better, I'd love to hear from them.

posted by: Kelli on 01.23.05 at 11:06 PM [permalink]

Are these inflation adjusted or not ? India generally has a high inflation rate, for instance.

The 2nd thing to note is that senior Execs have a good incentive to sound the alarm about this to tamp future wage increases and the like. Also, there is continual talk about moving into higher end work, which would support higher wages.

posted by: erg on 01.23.05 at 11:06 PM [permalink]

Silicon Valley (before Oracle laid off 5000 PeopleSoft employees) lost 1% of its jobs over the past year. During this *recovery* the area has continued to shed highly skilled jobs. What will happen in the next recession?

Computer science enrollments in this country have already fallen by 25-30%.

We're giving away our technology seed corn.

posted by: camille roy on 01.23.05 at 11:06 PM [permalink]


Yet at the same time employment in technology has boomed in areas in the US outside of Silicon Valley, especially non-costal California, Idaho, Arizona, etc. Take a look at Census results.

Silicon Valley is *expensive*, especially in housing. Combine that with how new technology has made it much less important to be physically located near every other technology company, or even collaborators, and it's easy to see why Silicon Valley has lost population and jobs. Remember how everybody in Silicon Valley promised that technology was going to shake things up, make physical distance less important, disrupt incumbents? Well, it happened, and one result was to make actually being in Silicon Valley less important. ("That is not what [we] meant at all. That is not it, at all.")

Computer science enrollments have merely fallen back to historical levels after the dotcom boom and hype filled them with people who didn't really like CS but thought that it was the big hot ticket item to easy wealth. Comparing everything to an unsustainable boom (that people realized even at the time was unsustainable) is unrealistic.

posted by: John Thacker on 01.23.05 at 11:06 PM [permalink]

"One of the mantras..."

Personally, I'm not much into mantras, or waxing philosophic about how far outsourcing might go, or how long it might go on; it seems an open question. What matters most to me, and to many people I know, is the devastation it has caused to friends whose jobs have disappeared. Including families with children. The wrenching changes; the desperation. In the face of this, the macro-economic benefits of it that we're all supposed to be enjoying are hard to discern.

"eroding the basic comparative advantage that India"

But as usual there is a silver lining: Those who've benefited most directly by the job transfer may soon have a chance to see the other end of it.


posted by: x on 01.23.05 at 11:06 PM [permalink]

Isn't labor productivity a huge part of compensation growth? This is one factor that no one is thinking of, least of all 'journalists' who write 'the sky is falling' articles in the Indian media. As the average level of experience of programmers in India rises, which will rise significantly each year because the average age now is so low, their productivity goes up, so does their market value (and billing rates).

As a former Wipro emloyee, I've watched in frustration as Wipro's senior managers complain loudly in the media about rising wages without being pushed back about rising billing rates. This in spite of the fact that between 2001 and 2004, wages rose just enough to keep pace with inflation and 2004 just made up for all those years.. (I'm talking about average wages for comparable professionals). If anything, average wages for fresh college graduates has *fallen* even in *nominal* rupees, in spite of a notoriously high consumer inflation rate (~5-6%). (Yes, even for Wipro's new hires. I've hired new grads for the same nominal salary than I was hired for 7 years ago!)

Costs of telecom, infrastructure and hardware have crashed since 2001; real estate, electricity and HVAC are up marginally. Wipro has been laying marble tiles in their new offices, for heaven's sake ! Indian companies have the bad habit historically, of believing that high valued assets are what you see on the balance sheet. Their per capita training spend is *pathetic* to say the least. I attribute the productivity growth to innate ambition in their employees, a fire in the belly which keeps them going.

(Lest anyone think I'm a 'disgruntled ex-employee' - I'm nothing of the sort. I'm as gruntled as it's possible to be, right now, making tons more as a management consultant, after getting an MBA in the US.)

Look at Wipro's margins. Earnings rose 58% during the last quarter, from last year's levels, on a sales growth of 30%. No one-time recognitions, no extraordinary items.. Doesn't look like margins are getting squeezed to me!

Trust me, Wipro, or any Indian software company is in no immediate danger due to rising wages. Now I'm on the buy side for Wipro's services and plan to fully squeeze them for every red cent I can get out of them - on behalf of American shareholders :-).

posted by: Sri on 01.23.05 at 11:06 PM [permalink]

US electrical and electronics engineers and computer scientists have experienced higher levels of unemployment over the past four years compared to any similar time-span since IEEE-USA was established in 1973. And in 2003, for the first time in history, the unemployment rate for electrical and electronics engineers exceeded the national average. There are many reasons for the persistently high levels of unemployment for our nation’s innovators, including the dot-com and telecom busts and the general business climate against hiring, as well as others. However, it is apparent that offshoring is a significant and growing cause of low demand for US high technology workers. While hiring seems to have picked up in 2004, it was not robust enough to offset the losses in previous years.

the poor labor market has caused young people to shy away from technology disciplines such as computer science in significant numbers. The Computing Research Association’s Taulbee Survey found a more than 20% drop in BS degree enrollments in computer science programs across the country. Even at top schools like MIT, the drop in electrical engineering and computer science enrollments was 33% over a two year time-span. Students are responding rationally.

Source: Ronil Hira, PhD

posted by: bhaim on 01.23.05 at 11:06 PM [permalink]


But, we can assume that students also behaved rationally and massively increased enrollment in those fields during the bubble. I certainly saw evidence of this firsthand. (And indeed, incredible arrogance on the part of many such tech majors against other sorts of majors, bragging about their jobs and bonuses, endlessly making fun of others.)

So these statistics only tell half the story; the story of decline from a huge bubble. What were the figures for increase in enrollment during the bubble? A boom in enrollment during the bubble would cause a surge in unemployment when it ended, followed by a decrease in enrollment back to or below historic levels.

Also, economists of all stripes are confident in the correcting nature of wages. Indian wages will rise to meet the average marginal value added in their industry. Cold comfort during the transition period.

posted by: John Thacker on 01.23.05 at 11:06 PM [permalink]

Yes, it is cold comfort during the transition period. Unemployment rates among computer scientists and electrical engineers are at record levels. The Ronil Hira presentation is located at:

The latest Bureau of Labor Statistics’ Displaced Worker Survey, released in January 2004, provides us some insight into the reemployment rates for workers. For workers who were displaced between 2001-2003, it shows that 35% were unemployed in January 2004, and of the 65% who were employed, only 43% earned at least as much as they did before displacement. So, the empirical data do not support the economists’ hope that displaced workers will be reemployed rapidly (one-in-three remain unemployed) and at substantially the same wages (three-in-five took pay cuts).

posted by: bhaim on 01.23.05 at 11:06 PM [permalink]

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