The WorldPaper: Global Economy: The Changing Geography of Cheap Labor

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Global Economy > The Changing Geography of Cheap Labor

Jobs cross the river Styx,
never to return

By Ashok Deo Bardhan and Cynthia A. Kroll
Commenting from Berkeley, CA

There is growing apprehension among business leaders, economists, and ordinary Americans that we are witnessing what may well be the largest out-migration of nonmanufacturing jobs in the history of the US economy.

This concern has been fueled by newspaper reports and economic news highlighting the layoffs of thousands of people in high-tech, software and service sector companies in the United States, and the practically simultaneous, seemingly coordinated establishment of offices and development centers, most often in India, resulting in hiring of thousands of new employees in that country.

For example, tabulation by the authors of reports in Indian newspapers and business journals for the month of July 2003 alone gave an estimate of 25,000 to 30,000 new outsourcing related jobs announced by US firms. In the same month, there were 2,087 mass layoff actions carried out by US employers resulting in a loss of 226,435 jobs.
The jobs being created in India and elsewhere are in a wide range of services sectors such as geographic information systems services for insurance companies, stock market research for financial firms, medical transcription services, legal online database research, and data analysis for consulting firms, in addition to customer service call centers, payroll and other back-office related activities....

Outsourcing of white-collar jobs

The software sector was the first service sector to transfer significant activity to foreign locations, leading to the creation of a critical mass of expertise and resources in concentrated locales, such as the city of Bangalore in India. The rapid dissemination of the Internet, the transnational networks set up by immigrants in the United States, and liberalization of emerging market economies created the conditions for a major burst of outsourcing in the 1990s, in hitherto primarily domestic segments of non-manufacturing sectors, such as telecommunications, retail trade, and finance (including banking and insurance).

While the “push” factors for business process outsourcing (BPO) or business services outsourcing (BSO) are similar to those for manufacturing and are largely cost-driven, the “pull” factors and attributes of countries and economies providing outsourced services are somewhat different. In addition to cost advantages similar to those offered by the manufacturing centers of East Asia, the ongoing outsourcing of business services jobs to India, Malaysia, Philippines and South Africa among others is also due to the widespread acceptance of English as a medium of education, business and communication in these countries; a common accounting and legal system (at least in some of the countries), the latter based on the common law structure of UK and US; general institutional compatibility and adaptability; the time-differential determined by geographical location leading to a 24/7 capability and overnight turnaround time; simpler logistics than in manufacturing, and a steady and copious supply of technically savvy graduates.

Average Salaries of Programmers
Poland and Hungary	$4,800 to $8,000
India	$5,880 to $11,000
Philippines	$6,564
Malaysia	$7,200
Russian Federation	$5,000 to $7,500
China	$8,952
Canada	$28,174
Ireland	$23,000 to $34,000
Israel	$15,000 to $38,000
USA	$60,000 to $80,000
SOURCE: CIO MAGAZINE, NOVEMBER 2002, SMART ACCESS SURVEY, MERRILL LYNCH

India’s information technology enabled services (ITES) sector, the primary destination of business services outsourcing from Western countries, now directly employs over 200,000 people with around $2.3 billion in exports, of which over 70 percent are to the US. While the sector is still small it is growing at a rate of 60 percent per annum.

The software services sector overall has exports of approximately $9.5 billion, of which over $7 billion are to the US. India’s National Association of Software and Service Companies (NASSCOM), the primary trade organization of all IT-related firms, forecasts that exports would hit the $50 billion mark in the next five years. By that time, the business process/business services outsourcing segment would employ over 2 million people, and the total exports of the IT industry would support over 8 million jobs.

The growth of the IT sector in general and the BPO segment in particular is not confined to India. Firms involved with software services outsourcing and BPO are rapidly gaining ground in the Philippines and Malaysia (call centers and other back-office BPO), China (embedded software, financial firm back-office BPO, some application development), Russia and Israel (high-end customized software and expert systems), and Ireland (packaged software and product development).

While it is difficult to estimate the exact number of jobs created in these countries in these sectors, let alone those transplanted and created by US firms, tentative evidence collected by the authors suggests that business process outsourcing and software outsourcing have together generated, at the very least, over a million jobs in the 1990s and hundreds of thousands more since the turn of the century.

Ashok Deo Bardhan is Senior Research Associate and Cynthia A. Kroll is Senior Regional Economist at the Fisher Center for Real Estate and Urban Economics, University of California, Berkeley.