Outsourcing: The Pain Is Here to Stay

By Mayank Maheshwari

Just like a dentist plucking away at an oral cavity, outsourcing behemoths India and China seem to be causing workers in the developed world a tad of discomfort. Unlike the dentist who pacifies patients by assuring them that the pain is temporary, however, these countries are making no promises of easing back.

Though outsourcing has lead to lower costs and cheaper, competitive goods benefiting consumers over the world, it has left thousands of workers in the developed world trapped on the dentist’s chair. The real dilemma is not the loss of jobs (which can be regulated via flexible labor markets) but a fall in real wages (wages adjusted for purchasing power parity). As more and more jobs move overseas, the question is whether workers in developed countries can make as much as they used to.

The Bank of International Settlements estimates wages in G10 countries (as percentage of national income) to be at their lowest level of 59% since 1975, where they were 63%, underscoring falling wages in developed nations. Though corporate profitability has increased at a brisk pace, outsourcing has led to a decline in domestic labor demand in the developed world thus reducing real wages. Those who lose out most are unskilled workers who’s jobs are being snapped up by cheaper South-Asians.

5 years ago, outsourcing to India/China was restricted to services such as call-centers, paralegal services, and unskilled manufacturing. This was partly due to the unavailability of sufficiently skilled labor in these countries, and to the lack of communication technology which would make more sophisticated transactions feasible. In such a setting, the developed world maintained an upper-hand in operations requiring skilled labor and technological sophistication. Thus, though unskilled workers lost jobs, skilled workers held the fort. Over the past few years, however, the developing world has invested heavily in education and technology. Morgan Stanley reports how every year, 1.2m engineering students graduate from India/China. This is the number of engineering students graduating from USA, Japan and the European Union combined. This, coupled with the advent of better communication systems, has made it possible to outsource services such as medical diagnostics, law, engineering and software design. The fate of skilled workers, then, is at peril. In order to protect jobs, therefore, wages are being lowered.