Living Economics

Moving Up by Staying Put
American companies are increasingly outsourcing back-office and software design work to highly skilled but lower-cost English-speaking foreign workers.

It is common knowledge that capital is more mobile than labor among countries. Capital moves to where the highest profit opportunities are. But labor is rarely allowed to move across national boundaries to where the highest paying jobs are. So labor in low-wage countries can improve their pay only by embodying their labor in exportable goods. But with the Internet, more and more service and professional jobs can be outsourced to the developing countries from high-cost Europe and the US. In other words, lower-cost labor is getting more "internationally" mobile without having to migrate to high-wage countries.

From big corporations to startups, companies are turning to skilled workers in English-speaking locations such as Ireland, Jamaica, India, and the Philippines. Companies are seeking workers to take jobs ranging from basic clerical, accounting, customer support, and legal services, to software design, scientific research, and pharmaceutical development. Last year, 185 Fortune 500 companies outsourced to India, according to NASSCOM (National Association of Software and Services Companies). Of the 86 Fortune 500 companies the association has polled this year, 73 said they planned to increase outsourcing.

The cost advantage of labor outsourcing is big. An Indian programmer earns $5,000 to $8,000 a year, according to Forbes Magazine. An American doing a similar job is likely to earn at least $ 50,000 to $80,000. There are also other advantages. Overseas workers in labor surplus countries value their jobs more and are likely to be the cream of the labor crop. The 12-hour time-zone difference means that American and the Asian workers can take turn to work on a joint software design project around the clock.

The implications for American workers are profound. Tom Peters, the management consultant, estimates that as much as 90% of today's American white collar and clerical jobs could be outsourced. The logical conclusion of this trend is for American corporations to outsource most of the back offices to overseas service providers and specialize in basic research or design at home.

Foreign IT workers have no doubt benefited greatly from cross-country labor outsourcing. India is now becoming a comparatively high-cost country, and Indian software houses are in turn outsourcing less complex projects to China. But compared to their fellow countrymen who have successfully migrated to the developed countries, the stay-at-home workers are still making much less.

This persistent cost advantage explains why even as the number of U.S. layoffs climbs, Fortune 500 companies continue to take advantage of India's large pool of programmers in a desperate attempt to improve their bottom line. Indeed, some American local software contractors are concerned about the depressing effect of foreign competition on the wages for U.S. programmers.

The trend towards globalization has often been thought of as having been brought about by the movement of goods and capital. But the upward mobility of foreign labor by staying put has been at least equally important.

  • Clifford, M. and Kriplani, M. "Different Countries, Adjoining Cubicles," Business Week, 8/28/2000.
  • Cruz, S. "coned 24/7," Star Tribune, 4/15/01.
  • Zimmerman, P. D. "Outsourcing Brainpower," St. Petersburg Times 6/17/01.
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