Outsourcing India: Triumph of the High-Skilled and Low-Wage Labor or Downfall of the US Labor Force?

Olga Kolodina Public Policy

University of Northern Iowa Cedar Falls, IA 50614 U.S.A.

Email: olga.kolodina@gmail.com

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Introduction

Outsourcing has emerged as a crucial aspect of globalization of the labor market, yet it

has proved to be as controversial as globalization itself. Free from national borders, the global economy functions as a single organism. Therefore, outsourcing of information technology jobs to India has an impact not only on the Indian domestic market for labor, but it inevitably affects the US workers. The general debate over the benefits and costs from outsourcing is primarily centered on two stakeholders – either the US-based IT corporations engaged in outsourcing or American workers adversely affected by the globalization processes. This paper facilitates the discussion of the impacts of IT outsourcing not only on the US labor market, but also on the labor force in India. Currently, India is the largest market for high-skilled and comparatively inexpensive labor demanded by global IT corporations.

The paper approaches both Indian and American high-skilled workers as lawfully interested parties in the given issue. The analysis of IT jobs outsourcing in India on the labor force in India and the US demonstrates that the impact has not been uniform for two stakeholders. Liberalization and modernization of labor markets have made Indian and American professionals competitors and increasingly substitutes. The largest US-based IT companies turned to India in their search for the best high-skilled specialists. Outsourcing creates jobs and boosts demand for highly educated IT engineers in India. It has been assumed that well-educated and low-wage Indian workers tend to gain from outsourcing of IT jobs by US-based companies, while critics of outsourcing and free labor market claim that American IT engineers are hurt by the trend of shifting jobs overseas. In addition, discussion of outsourcing cannot avoid the two most commonly presented arguments that Indian workers are more competitive because of relatively lower wages and that Americans are not willing to study hard sciences, which leads to a shortage of IT engineers in the US. Through testing these presumptions, the paper discusses the actual impacts of IT outsourcing on the labor force in India and the US and derives relevant implications for the US education policy.

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Globalization and IT Outsourcing

India is a New Frontier for Growing IT Industry. Challenges to the US Labor Market Posed by Outsourcing.

Outsourcing has emerged as a product of globalization and internationalization of

economic relations. Pete Engardio of Business Week, who also has been invited to testify before the House Committee on Small Business, calls outsourcing “globalization’s next wave – and one of the biggest trends reshaping the global economy” (Engardio, Bernstein, Kripalani 2003, para.6). Globalization united and interconnected national economies and regional markets. It fostered large and small countries to trade, exchange, and rely on each other so that none of them can be successful without cooperation on a global scale. It made production of goods and services more cost-efficient. Globalization and its offsprings – multinational corporations – gained an extraordinary power to dictate sovereign countries their rules and interests, which have a tremendous impact on a nation’s economy. Technological advances in the output market transformed markets of all factors of production like never before, causing the demand for high-skilled labor to rise internationally. Technology posed new challenges for today’s workers, favoring those with good education and unique skills. It opened new horizons for big businesses, as well as small firms, and individuals. As a result of all these changes, the global community should be better-off, because now much greater economic outcomes can be achieved.

Studies on outsourcing predominantly emphasize the key role of technology in the outsourcing revolution (Kobayashi-Hillary 2004; Benner 2002). Chris Benner names three prominent processes that occurred in the sector of information technology in the past decades and, consequently, had an impact on the inputs market. These major trends include changing boundaries of the economy, changing industrial organization, and changing forms of competition (Benner 2002). He notes that globalization and technology enable new forms of management and changes market conditions so that new opportunities become available. By the same token, the labor market in the information economy has become more volatile and flexible (Benner 2002). What he means by flexibility of the labor market is “the ability to change or react to change with little penalty in time, effort, cost, or performance” (Benner 2002, 14). Flexibility helps to understand the type and direction of transformation that the IT labor market is undergoing. Benner (2002) notes that software and Internet industry in the US developed at the fastest pace since the 1990s. It accounted for introduction of the most innovative employment practices and turnover in the market of labor force. James Brian Quinn, Philip Anderson and Sydney Finkelstein praise the benefits of outsourcing, “In today’s hypercompetitive climate such core competency with outsourcing strategies let companies be simultaneously the lowest cost, broadest line, most flexible and most highly differentiated producer in their market. No other strategy supports efficiency (through focus), innovative flexibility (through multiple sourcing), and stability (through market diversity) to the same extent” (Quinn et al. 2001). Outsourcing of IT jobs in India is a perfect example of the new type of employment in the labor market that will be explored in this paper. Flexibility is important for individual firms as well as the entire IT industry to remain efficient. Therefore, taking advantage of new opportunities given by globalization is the best policy for the IT corporations to sustain their economic competitiveness.

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India found its niche of specialization – IT outsourcing. India-based companies have been performing very successfully in this market segment: “Infosys, Wipro and TCS may be the Indian giants this year and they are working hard to remain at the top of the three, but the market is evolving so fast that new service providers are emerging each and every week” (Kobayashi-Hillary 2004, 79). The top three IT corporations in India are outstanding examples of excellent management based on innovation and flexibility. Their success resides on talented leadership and expertise of top executives and their ability to attract venture capital and high-class technical education and extensive experience of companies’ personnel, who can create and develop high-quality product.

Globalization and internationalization of economic contacts allowed large and small suppliers of IT-based services to move the production of their goods and services to the foreign markets. According to the data cited by Khan et al. (2003), the global market for IT outsourcing has grown from $96 billion to $151 billion between 1998 and 2000 (2). Moreover, they find statistical evidence of India’s overwhelming dominance in offshore IT outsourcing and predict it will retain its leadership position in this sector for a substantial amount of time (Khan et al. 2003). Bhagwati et al. (2004) conclude that whatever form outsourcing takes, whether it produces an intermediate input, a new or existing good, it augments productivity and generates aggregate benefits for the economy and consumers who enjoy cheaper goods and services (105). The paper will attempt to identify whether outsourcing emerged as a response to the needs of cost reduction and the shortage of high-skilled IT specialists in the US, as suggested by Khan et al. (2003), or there were other predominant factors responsible for the triumph of outsourcing.

Defining Outsourcing and IT Engineers

The term “outsourcing” is not a novelty in economic vocabulary. For many decades in

the past, various types of services have been outsourced by American companies (Kobayashi-Hillary 2004). However, the present meaning refers to outsourcing as a process of employing internationally provided services by means of the Internet and other electronic mediums (Bhaqwati, Panagariya, and Srinivasan 2004, 93). The General Agreement on Trade in Services (GATS) identifies outsourcing as the Mode 1, when “trade in services involves arm’s-length supply of services, with the supplier and buyer remaining in their respective locations” (Bhaqwati et al. 2004, 95). The underlying assumption is that outsourcing and technological development are interconnected. It was software development and communication technologies that enabled fast and cheap delivery of services internationally, shaped outsourcing modes, and accounted for its gigantic growth. Precisely, outsourcing as a flexible hiring strategy would be impossible without the technological breakthrough of the last decade. In his discussion of IT outsourcing to India, Kobayashi-Hillary (2004) brings in the distinction between outsourcing as a mere delegation of a rather narrow and specific service to an external company and strategic outsourcing. Strategic outsourcing occurs on a higher level of a business process (as high as the R&D level) and results in value-added production and more efficient performance (Kobayashi-Hillary 2004). Significantly, IT outsourcing to India has been moving towards strategic and value-added outsourcing, when American corporations combine their strength with Indian partners in pursuit of a higher level of productivity.

For the purposes of consistency and clarity of the discussion, it is very important to specify what type of high-skilled workers and labor markets is in question. When analyzing the

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impact of outsourcing on either Indian or US market for IT engineers, it is necessary to define who the IT specialists are. The National Science Foundation in Science and Engineering Degrees: 1966 – 2004 (2007) refers to two main approaches in identifying such a category of high-skilled workers as “engineers.” One approach used by the Bureau of Labor Statistics and National Science Foundation defines workers as engineers by their occupation. Occupational classification considers all people employed in the engineering sector, meaning performing some kind of engineering work. The other approach tends to identify engineers by the highest degree earned, assuming, of course, that this degree should be in one of the engineering fields (National Science Foundation 2007, 3-9). This research paper assumes the occupational approach to defining IT engineers, because it is logical to presume that most of the workers in an engineering occupation possess a certain level of education and/or training in the field of engineering; thus, they are acting as engineers in the market place. The distinction that engineering degree holders must also be engineers by occupation is crucial for our research. The paper examines the impact of outsourcing on the labor force, which includes all the employed as well as unemployed people looking for an engineering job and excludes the category of population that is not in the labor force.

Another clarification needs to be made, for there are several types of academic degrees referred to engineering, and engineers have distinct qualifications. Since the paper looks at outsourcing trends in the IT sector of the US economy, the definition of engineers has to be narrowed down even further. The paper follows the classification of engineering fields of study developed by the U.S. Department of Education for the Integrated Postsecondary Education Data System (IPEDS) Completions Survey, which is also used by the National Science Foundation in its reports. Three types of engineering fields of study have the closest relevance to the IT sector – electrical engineering, computer sciences, and mathematics. According to the chosen classification, computer science engineering includes such fields as computer programming, data processing, information sciences, computer system analysis, web page design, database management, etc.; electrical engineering refers to computer engineering and electrical, electronics, communications engineering; and mathematics embraces such specializations as applied mathematics, mathematical statistics, business statistics, etc. (National Science Foundation 2007, 67-69). Therefore, the derived definition of IT engineers (or specialists) discussed in the paper is high-skilled, highly educated professionals with an electrical engineering, computer science, or mathematics degree of a bachelor’s level or higher employed or seeking employment in the IT sector of the economy. Thus, these specialists constitute the market for IT engineers, which is the subject of the research paper.

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The Impact of Outsourcing on the Labor Force in India

Growing Demand for Indian Specialists by US-based IT Corporations Creates New Jobs and Career Opportunities for Engineers in India.

As it has been stated earlier, the possibility of shifting IT operations and even R&D to

remote destinations like India leads to complex economic trends. India as a supplier of labor for US corporations certainly goes through profound economic restructuring and development of its labor market. Engardio et al. (2003) call opportunities created by the global knowledge economy “a blessing for developing nations” (para.10). Information technology and information technology-enabled services (ITES) produced by the information revolution have been recognized as probably the most promising spheres of India’s economic development (Norton 2005, 48).

Business process outsourcing (BPO) in the IT sector of India’s economy grew at an annual rate of 29 percent in 2002, to command 80 percent of the world market, making it fastest growing industry in India. Exports in the IT sector worth $12.5 billion in 2004 – one quarter of India’s total exports – are expected to grow to $19.8 billion in 2008 to gain 47 percent of the total world market at that time (Norton 2005, 48).

There is no doubt that the Indian economy is growing predominantly due to expansion of its services sector, where information technology services play an increasingly important role.

Growing numbers of IT jobs outsourced by the US high-tech corporations provide strong evidence of the increasing demand for Indian IT engineers. The Forrester Research, Inc. that is frequently cited as a major trusted source of the labor force data estimates 3.3 million U.S. jobs in nine occupational categories, including but not limited to engineering and computer operations, to be outsourced by foreign countries by 2015 (Bhaqwati et al. 2004, 97). Although not all 3.3 million jobs go to India, it is reasonable to predict that the overwhelming majority of IT jobs will be provided by Indian outsourcing companies. In all likelihood, it would be more accurate to look at the issue from India’s perspective and calculate the number of IT jobs created in India alone as a result of outsourcing. Data available from India’s National Association of Software and Service Companies (NASSCOM) demonstrates that over the five year long period from 2000 to 2004, a number of outsourced software developers and call center operators increased by 353,000 people reaching 505,000 employees, who provide IT services for clients outside of India (Bhaqwati et al. 2004, 98). According to NASSCOM projections for the year of 2008, the estimated combined demand for high-skilled specialists in several IT-enabled services, such as call centers, medical transcription, database services, etc., resulted in a 1,100,000 figure (Arora and Athreye 2002, 267). NASSCOM is certainly one of the most reliable sources of statistics; however, there is a need for the more up-to-date data to be able to closely identify the size of the demand for IT specialists. Another available statistic presented by Bardhan and Kroll tell that the information technology enabled sector in India employs over 200,000 IT specialists, and 70 percent of exported services have the US as their destination. They also note that the growth rate at this sector of India’s economy is estimated at 60 percent a year (Bardhan and Kroll 2003, 2). David Coe (2008) explains that “productivity increases in offshoring enterprises may lead them to increase hiring, potentially resulting in a net increase in jobs” (49). Arora and

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Athreye (2002) show how the growth in the software industry in India affected the employment rate. During the period from 1997 till 2000, the number of IT specialists employed in the software industry in India grew from 160,000 to over 410,000 people (Arora and Athreye 2002, 254). Despite certain level of discrepancies in numbers provided by the various studies, India attracts a lot of attention by its ability to supply hundreds of thousands world-class IT engineers.

The logic of the trend is clear – outsourcing of IT jobs to India leads to specialization of the country in the IT-enabled services, and, through specialization, Indian-based companies are likely to achieve a higher level of productivity. In turn, specialization and high productivity of the Indian labor force allows US-based corporations to expand their international operations further and outsource more IT engineers. Opponents of outsourcing would argue that thousands of IT jobs that became available in the India’s labor market were not created but rather transferred from the US leaving qualified Americans unemployed (Bardhan and Kroll 2003). Assumption that American and Indian IT engineers are substitutes in the global labor market to a certain degree explains the adverse impact of IT jobs outsourcing on US employment and wages. The critique of outsourcing is based on the broadening range of career opportunities for Indian engineers and computer science specialists.

Bhagwati et al. (2004) construct an economic model, demonstrating gains from outsourcing of skilled labor in the market with pre-existing trade. They explain that technological innovation and the possibility to employ labor at a lower wage expand the demand for labor, which can be satisfied through outsourcing. Outsourcing happens in the second sector of the economy, which is represented by the Value of Marginal Product of Labor (VMPL2) curve. Bhagwati et al. (2004) note that, “the increase in output for the home country consists the sum of the two triangles E0FE’ and ABE’ ” (103). The gains from outsourcing are enhanced by the augment in the labor employed in the second sector of the economy. When applied to the market of IT engineers, this model shows that the number of outsourced engineers would be graphically equal to the distance O2O’

2 on the horizontal axis. The increase in supply of labor (distance O2O’

2) equals to the excess demand for this type of labor (distance GE’) at the lower wage R’. Exhibit 1. Model of Outsourcing with Pre-Existing Trade in Goods

Source: Bhagwati et al. 2004, 102

The presented model shows that outsourcing of skilled workers affects the employment level and generates the net gain in the economy. Bhagwati et al. (2004) conclude that “offshore outsourcing is generally beneficial to an economy” and preferable to free trade without outsourcing given that there are no distortions in the market (101, 104). Theoretical analysis of the impacts of outsourcing continues with regards to the US labor market in the next section of the paper.

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The Crucial Role of Education in Rising India’s Competitiveness There is a lot to be said about a very low educational level, even illiteracy, and just as low

socioeconomic status of the majority of the Indian population. Almost 35 percent of people in India still live in poverty according to India’s standards, and half of these people earn less than $1 a day (Norton 2005, 37). Primarily, the poorest people in India live and work in the realities of village economy. At the same time, however,

Remarkable in this context has been the emergence of a significant middle class, of households that are earning more than necessary for simple survival… A report to the Millennium Conference held in New Delhi in February, 2000, estimated that 25 percent of the total population in India is affluent and upper middle class, with sufficient income to stimulate economy as consumers. This class now equals the total population of the United States. Another 40 percent of the population is identified as lower middle class (Norton 2005, 37).

The quote by Norton illustrates the tremendous potential that enables India to develop its human resources and succeed in the global information economy.

Bhaqwati et al. (2004) emphasize that technological advancements are not the only factor that facilitates the growing scope outsourcing. Besides cost saving, Bardhan and Kroll (2003) attribute success of outsourcing operations in India to “a steady and copious supply of technically savvy graduates” (2). Positive trends in India’s higher education system and broad employment opportunities created by global IT industries facilitate educational attainment and raise skill level of Indian engineers and computer specialists. Investment in higher education and skills of IT engineers in India leads to growing numbers of highly qualified IT engineers in India.

As noted by Arora and Athreye (2002), software development is a labor intensive service, despite its dependence on the new technology. Creation of the first unit of IT product requires more substantial labor resources with the relatively steady amount of capital. This specific characteristic of the IT industry explains a crucial significance of human capital – amount and quality of supplied labor. It also explains why the IT market is hungry for the best and brightest IT engineers in the world, which is evident by the excessive demand.

Wadhwa et al. (2007) point out the role of the bottom-up and market-driven approach in the development of engineering education in India. Hundreds of institutes of higher education have been established by the government, but many more schools have been founded on private funds. The bottom-up approach explains the great diversity and number of post-secondary schools in India. Over the last ten years, India demonstrated an impressive growth of the number of higher education institutions. The Annual Report 2007-08 of the Ministry of Human Resource Development of India reports 416 universities and 20,677 colleges are operating in modern India (2008, 118). Among fifty two institutions funded by the Central Government, seven Indian Institutes of Technology (IITs), four Indian Institutes of Information Technology (IIITs), and twenty National Institutes of Technology (NITs) can be found (Ministry of Human Resource Development 2008, 158). World-famous IITs, identified by The Institutes of Technology Act, 1961 as “institutions of national importance,” serve the primary purpose of giving “world class education in engineering and technology” to the best of Indian students (162). Business’ interest in a wide pool of talented and well educated professionals and, therefore, in a strong and innovative education system determined another characteristic of Indian education – it is market-driven. The response to the market demand for technical specialists was to establish more technical schools throughout India, in particular twenty new IITs are to be opened, on the basis

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of public and private partnership (159). In terms of engineering institutions, the numbers increased from 669 in 1999-2000 to 1,478 institutions in 2005-06, with 88% being private schools (Raychaudhuri and De 2008, 54).

The statistics provided by the National Association of Software and Service Companies (NASSCOM) and the All India Council for Technical Education (AICTE) demonstrate the steady growth in Engineering, Computer Science, and IT degrees awarded in India (Wadhwa 2007, 75).

Exhibit 2. Time-series of Bachelors’ Degrees Awarded in the US, India, and China

Source: Wadhwa 2007, 75.

By the 2004-05 academic year, there were 170,000 bachelor’s degree holders in all three areas of study in India, whereas the U.S. produced only 133,854 graduates with the equivalent diplomas (Wadhwa 2007, 75). Arora and Athreye (2002) bring in the results of the study that surveyed almost 60 software firms in India. According to this study, over 80 percent of employees working for these companies had engineering degrees (262).

Coe (2008) speculates that the comparative advantage of India “will remain in low- or medium-skill tasks for some time, given the challenges of increasing the quality of education and average levels of education” (49). He does not specify, however, how long it will take for India to gain the comparative advantage in high-skilled jobs in the IT sector, and he does not deny it either. Other scholars like Bhagwati et al. (2004) are also somewhat skeptical about India’s ability to compete with the US in terms of its labor force. They argue that only small fraction of Indian university graduates have a proficiency in English to be able to perform work internationally and it will take a long time to reach the number of high-skilled professionals that will noticeably affect the US labor market (Bhagwati et al. 2004, 108). Nevertheless, India does have the potential to create a market of highly educated and skilled IT engineers that would compete on the global scale for the most advanced technology-driven jobs. Virtually, India has been undertaking this path for positioning itself as a country that educates the world’s best IT and computer science engineers.

Outsourcing gave India unprecedented opportunities for development and economic growth. Despite all the benefits and positive impulses emerged from outsourcing, India is still dependent on the US market of IT outputs and therefore remains rather vulnerable. McManus and Floyd (2005) observed what challenges India would have to address in the future: access to partners, low cost venture capital, support of political leaders and policymakers, as well as uncertainty about skilled labor resources (28). The US economy, by contrast, is predicted to become dependent on growing consumer demand in India, which means that today’s investment in Indian labor force is going to be worthwhile when multinational IT corporations decide to expand their sales operations in the Indian market.

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The Impact of Competition for the Best IT Professionals on Wage Rates and Earnings The discrepancy in wage rates in India and the US is supported by the solid data – wages

paid to Indian high skilled workers are much lower than those earned by workers in the US. Periodical publications suggest that the ratio of US and Indian wages is $100 to $20 an hour or, in other words, a cost of Indian labor in India is 60 percent lower than it is in the US (Engardio et al. 2003). McManus and Floyd (2005) find that wages in India are one-eighth of the US level.

Although Arora and Athreye (2002) use data from 1995 on international salaries paid to software professionals, it is clear that the salary range of various types of software professionals in India still varies substantially to this day. For example, a development programmer earned $8,000 in 1995, a systems analyst was paid $14,000, and a project leader earned as much as $23,000 in India at that time (256). They point out that while Indian salaries remain much lower in comparison with other countries, engineering earnings in India exceed the national average by almost 20 times (267). In addition, if wages in the software industry continue to rise at 20 percent rate per year, as it was in the late 1990s, the IT companies will face a problem of recruiting and retaining talented engineers (262). Shifting demand and supply of IT specialists in India are changing the market equilibrium, which affects the price companies are willing to pay for high-skilled and highly productive workers. One of the serious outcomes pointed at by Arora and Athreye (2002) is the crowding-out effect stemming from wage incentives for professionals in other industries to migrate into the growing IT industry.

While the educational level of Indian and American IT specialists is comparable, India still enjoys a comparative advantage of its relatively low wages and salaries. A combination of growing numbers of well-educated and high skilled workers and the world’s lowest wages secured India’s leadership in the global market of IT services. Bardhan and Kroll (2003) and Khan et al. (2003) present the same data on average annual salaries of programmers in major IT specializing countries. Bardhan and Kroll (2003) refer to the 2002 National Compensation Survey of the Bureau of Labor Statistics for a comparison of hourly wages in the US and India (4-5).

Exhibit 3. Cross-Country Comparison of Salaries and Wages of IT Specialists

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Source: Bardhan and Kroll 2003, 4-5. Benner (2002) provides some information on salaries of IT specialists in the US that illustrates the earnings gap between American and foreign engineers. According to Joint Venture: Silicon Valley Network, the average payroll in Silicon Valley was $66,400 in 2000, which is 9 percent higher than the previous year. The annual payroll in the software sector of the IT industry was much higher - $124,700 in 1999 (Benner 2002, 207). The author attributes the fact of generous compensation paid to IT engineers in the US to high levels of productivity in the high-tech industry, as well as the demand for highly skilled workers that contributes to rising wages in this sector of the labor market. Benner’s definition of outsourcing as “a category which includes temporary help agencies and other companies providing essential services to the region’s core information technology firms” is so broad that it remains uncertain what type of outsourcing he refers to – domestic or offshore (210). Yet, his contemplation demonstrates that outsourcing allows IT companies, at the very least, to cut costs.

A cross-country comparison of annual salaries and earnings can be quite difficult, for the actual purchasing power of a dollar spent in one country varies from its value in another state. In order to draw a complete picture of the situation with growing wages and salaries in India, it is essential to compare American and Indian salaries in terms of purchasing power parity. Due to fluctuations in exchange rates, differences in prices and consumer baskets, and a substantial gap in the standard of living, salaries earned by IT engineers in India presented in US dollars do not reflect the actual purchasing power in India’ domestic market. The PPP conversion factor demonstrates that 15 Indian Rupees are needed in India to buy the same amount of goods as $1 can buy in the US. Alternatively, according to the ratio of PPP conversion factor to market exchange rate, only 0.4 of a US dollar is needed in India to purchase the same that costs $1 in the US (The World Bank 2008). The existing market exchange rate underestimates the purchasing power of Indian rupee in India. It means that for a compatible bundle of goods, people in India pay less than Americans pay in the US, because the price level is much lower in India. Therefore, the actual earnings of an IT engineer in India ranging from $5,880 to $11,000 in 2002 (Bardhan and Kroll 2003) when corrected in terms of the PPP appear to exceed the reported level. Indian salaries quoted in US dollars do not reflect the fact that with these salaries, Indians can purchase two times or more of what one would expect based on the market exchange rate.

Increasing specialization in IT enabled services and growing competition for the best engineers in India must eventually lead to a rise in wages and non-monetary benefits of Indian IT engineers in the future. Bhaqwati et al. (2004) observe that outsourcing has an impact on wages. A strong demand for IT and software engineers creates benefits for highly educated and high-skilled workers in India (McManus and Floyd 2005). Provided the demand for IT specialists remains high, “IT workers will seek comparable salaries to their western counterparts,” which will restore the wage balance in the market of IT engineers (McManus and Floyd 2005, 30). Coe (2008) notes that real wages have already started to rise in the regions where the IT industry dominates in the economy, and this trend will eventually reduce the comparative advantage of India (50). Coe’s argument probably holds truth, but the fact is that wage rates in India still are and will continue to be much lower than the US wage rates for a substantial period of time. Furthermore, there is no data available on at what level of wage rate US-based corporations seeking outsourcing in India will become indifferent between hiring in India and hiring in the US. It is hard to predict whether the growing supply of IT engineers will push the increasing wages back down, since IT industry is continually expanding and its potential to absorb more of the Indian labor force seems to be enormous. Moreover, with the spread of technology and

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economic growth in India, the country’s economy has a good chance to heat up the demand for IT graduates and professionals by launching domestic IT businesses.

The comparison of the Indian and the US levels of earnings in the IT sector of the economy clearly shows that India is a place to go if a company desires to cut its costs. Another key question is whether outsourcing IT jobs from India merely gives corporations access to a cheaper input or it makes their operations more productive and efficient at the same time.

India Derives the Benefits from its Comparative Advantage, Not Only a Cost of Labor Advantage

Competition in the market of high-skilled workers and demand for the world’s best IT

specialists forced high-tech corporations to turn to India not simply because of cost saving considerations. The study performed by Wadhwa et al. (2007) discovered that although salary and personnel savings constitute a part of the whole package of advantages of outsourcing, there are other factors that attribute to the expansion to offshore labor markets. McManus and Floyd (2005) state that, “Due to the low costs and high quality, using offshore resources in selected countries makes good economic sense” (26). There is no doubt that outsourcing promotes cost saving, yet not all of this saving comes from employing lower-wage workers. Experts name incentives to engage in outsourcing other than pure cost saving - 24/7 business operation; the opportunity to better meet local market’s needs by customizing products with a help of local workers; benefits of access to knowledge, skills, and technological advancements available in the foreign markets; the possibility to acquire short-term temporary services without increase in operational costs; and a more productive organizational structure when all internal resources are concentrated on R&D and core projects (McManus and Floyd 2005, 27; Wadhwa 2007, 77). Interpretations of the reasons for access to new markets vary, but it is observed that US-based corporations have vivid economic interests in developing their operations in regions with rapid economic growth and excessive supply of well-educated labor force such as India.

On the other hand, as the case with rising wage rates shows, costs of shifting business operations to India remain low but they are gradually rising. Saxenian (2005) explains, “Silicon Valley producers no longer view locating and sourcing from India and China as an efficient way to reduce costs; rather, they argue that the only reason to work with producers in those locations is to gain access to talent” (55). McManus and Floyd (2005) agree with this argument stating that the pool of technically qualified specialists in India is another major advantage in addition to lower costs. Understanding of this reasoning is a key to discovering true causes of a downfall of the US market for high-skilled workers.

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Signs of Downfall of the US Labor Force

Various perspectives on the downfall of the US market for high-skilled labor coexist. One

infers that the lack of qualified specialists in the US market forced IT firms to seek engineers and software specialists with more advanced skills abroad (Khan et al. 2003, 2; Lee Hecht Harrison 2008). Another standpoint suggests that outsourcing was produced by globalization and its urge for cheaper inputs; therefore, it hurts American workers by taking away their job opportunities. The discussion of success of IT outsourcing in India in the previous section of the paper sheds some light on why the American labor force is losing its competitiveness. The progress that India achieved in educating high-skilled and world-class engineers determined India’s ability to attract US companies to take advantage from its labor force, to prepare and sell the best and brightest workers in the international labor market. National Science Board (2008) in Science and Engineering Indicators 2008 points out the importance of technical higher education for a country’s economic development, because it is higher education that is primarily responsible for advancement and competitiveness of the country’s workforce. The report notes that in recent years many developing countries succeeded in expansion of their higher education systems, especially in the areas of engineering, natural sciences, and mathematics, so that it enabled them to make a tremendous progress in developing knowledge-based sectors of their economies (National Science Board 2008). The following discussion seeks to see whether it is insufficient education that insidiously reduces chances of the American workers to compete for IT engineering positions or it is a shortage of domestic supply of qualified IT specialists that undermines US competitiveness.

Without a doubt, the US is the world’s largest knowledge-intensive economy that is praised for the ability to “create well-paying jobs, to contribute high-value output, and to stimulate economic activity generally” (National Science Board 2008, O-8). If this description of the US economy is accurate, why is its viability and capacity to innovate and create high-skilled jobs the matter of public policy concern? The concern, however, rests on the valid grounds, for US-based companies seem to redirect a growing portion of their investment overseas, launch new businesses, and expand productions in the foreign markets. Outsourcing of IT jobs increasingly contributes to the economic growth of alien countries, while the future of American workers becomes less certain and predictable. On the one hand, outsourcing of IT jobs to India highlighted some weaknesses of the American workforce; but on the other, it presented some opportunities for the future as well.

Is the Argument of Insufficient Supply of US-born Graduates with Degrees in Engineering and Computer Science Valid?

The argument that the US experiences an insufficient supply of qualified IT engineers has

its advocates and critics. The 2008 Job Market Report states that, while only 26 percent of the population has a bachelor’s degree or higher, it is the lack of well-trained graduates that caused U.S. businesses to seek human resources abroad (Lee Hecht Harrison 2008). In contrast, the survey of fifty eight US-based corporations that engage in outsourcing conducted by Wadhwa et al. (2007) found no evidence of engineering shortage in the US. Researchers analyzed job

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acceptance rates as an indicator of competition in the market for the best qualified engineers. The study reported that the majority, precisely 80 percent, of engineering vacancies can be filled by the employer within four months (Wadhwa 2007, 77). The survey did not ask the respondents to specify whether these hired employees were US or foreign citizens on a H1-B visa; yet it revealed some other significant fact regarding IT offshore outsourcing. In terms of engineering skills and knowledge required by the IT employers, the study found that “U.S. engineering jobs are more technical in nature than those sent abroad,” and this answer was given by 44 percent of respondents. Only 1 percent said that jobs outsourced abroad are more technical, and a rather big group (33 percent of respondents) estimated them as being equivalent in nature (Wadhwa et al. 2007, 77). These findings show that the US remains a leading power in IT innovation and has not lost its competitive edge. The global market is developing at an increasing pace causing structural transformations and placing challenges for the US competitiveness.

Data from the National Science Foundation (2007) reported in Science and Engineering Degrees: 1996 – 2004 are consistent with the findings by Wadhwa et al (2007). Time-series tables of computer science degrees awarded in the US show a steady growth of degrees awarded for all three levels of higher education from 1990 till 2004. Data for electrical engineering degrees awarded during this period demonstrate some years of decrease for bachelor’s and master’s degrees and insignificant fluctuations for the doctorate degree during this period. However, the last available numbers from 2004 of bachelor’s electrical engineering degrees awarded are comparable with the early 1990s numbers: 21,342 degrees in 2004 vs. 23,015 in 1990. The number of 12,173 master’s degrees awarded in 2004 is much higher than the 1990 number of 8,009. In 2004, there were 1,649 doctorates awarded, which is lower than the maximum level reached in the fifteen-year period, but it is still greater than 1,276 degrees that were awarded in 1990 (National Science Foundation 2007, 54). Over the last twenty years, the trend in engineering education attainment and degrees awarded remained rather stable with no drastic reductions. The following figure presented in the Science and Engineering Indicators 2008 shows that both undergraduate engineering enrollment, which accounted for 409,300 students in the US in 2005, and graduate enrollment of engineering students at 139,800 in 2005 slightly decreased after 2003 (National Science Board 2008, 127-128). However, according to the graph, engineering enrollment in the US is higher than it was about ten years ago. Given statistics confirm the fact that there has been no decline in the supply of IT specialists in the U.S. labor market over the last decades.

Exhibit 4. Undergraduate and Graduate Engineering Enrollment in the US.

Source: S&E Indicators 2008, 127-128.

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The findings presented above contribute to the argument that it is not a shortage of IT engineers that causes the downfall of the US labor market. The following analysis looks into how the developing labor market in India and economic recession in the US can possibly affect employment and wage rates of American workers in a negative way.

Employment in the IT Sector – Past Trends and Forecasts into the Future. Does Outsourcing Really Lower Job Opportunities and Wage Rates of US Engineers?

Some groups of American workers feel the negative impacts of a changing global environment more than others. Along with trends of globalization and labor outsourcing, the impact on the domestic labor market is enhanced by the periods of economic slowdown and stagnation. The economic theory of labor demand allows modeling changes that are likely to be observed due to shifts in demand and supply for in the specific market such as the market of IT engineers. Outsourcing IT engineers from India essentially leads to an additional supply of workers in the market of this particular type of labor. When Indian engineers enter the market, the total supply of available workers is greater than the original amount, which is presented by the parallel shift of the supply curve on the following graph. The graphic model of the short-term effects of outsourcing on the domestic market clearly shows that, as a result of the increased supply of labor, companies gain more power in the market and can decide how many workers to hire and at what wage. The wage rate inevitably goes down for both categories of workers selling their skills and knowledge in this marketplace. Another important implication of the increased supply of IT engineers due to outsourcing is the crowding-out effect. As the total employment went up from point E0 on the horizontal axis to point E2, adding that many jobs in the IT sector, the composition of employed workers has changed. The total number of Indian engineers now employed as a result of outsourcing is the distance E1 E2. The segment E1 E0 shows how many US workers are replaced, or substituted, with less costly Indian labor. This is the negative effect of outsourcing that its opponents are concerned with.

Exhibit 5. Short-Term Effect of Outsourcing

Wage

Employment

wₒ w1

S S' (natives + offshore)

D

E1 E0 E2

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The changes described above can be experienced predominantly in the short-run. However, experts dealing with economic and labor policies are careful to make a conclusion about the negative outcomes for the US economy as the crowding-out effect and declining wages. In the short run, adverse effects of shifting equilibrium caused by foreign labor entering the market might be more noticeable by American workers specializing in the same occupations. In the long run, however, the negative outcomes, such as displaced workers and suppressed wage rate, will be offset by the positive outcomes – expansion of the capital available to the companies and a headway in specialization of the US workers employed in the IT industry. The following graph visualizes that it is quite possible that an increase in supply of labor will be followed by the growth in demand for this input. Once IT corporations get a feel that there is an extensive pool of qualified and efficient workers that could be employed, the demand for them starts moving to the right catching up with the increased supply.

Exhibit 6. Long-Term Effect of Outsourcing

The graph shows one of the possible scenarios, when the wage rate remains unchanged from the situation before outsourcing. In the long-run, the merging markets of IT specialists, such as the US and India, will make workers perfectly substitutable. As a result, firms will be indifferent to who they hire, because there will be no cost of labor advantage or skill disparity. Yet there still will be competition among the workers for better positions and opportunities. Therefore, both American and Indian workers must be prepared for the challenges of perfect competition spurred by outsourcing and globalization of the labor market. The economic theory of labor demand suggests that the competitive equilibrium across labor markets will be achieved overtime, if workers in both countries are mobile and perfectly substitutable. With businesses going global, workers do not need to migrate to the foreign countries to perform work. American IT companies can enter the India’s market to take advantage of its extensive labor force. Companies, concerned about profit maximization, have a genuine interest in employing the cheapest input. In the IT industry, labor plays a very important role and cannot be easily exchanged for more capital. Businesses have been actively taking advantage of technological innovations, substituting telephone operators with automated

Wage

Employment

S S' (natives + offshore)

E1 E2

wₒ

D D'

16

response systems. However, when production or service involves high-value labor, it becomes very hard, even impossible to cut on the high-cost input – innovative talent – and employ more capital – computers and other types of equipment. Therefore, the demand for high-skilled workers in the IT sector of the economy will always remain at its maximum. Substitution of US workers for Indian workers is the only possibility as long as Indian labor remains less costly and achieves the same level of productivity. Today, the competitive equilibrium in India and the US is not reached yet, but India is rapidly building up its human capital potential to compete with the US in the IT market. The paper continues with discussion of the actual trends in employment, higher education enrollment, and earnings of IT engineers in the US. According to the Science and Engineering Indicators 2008, in the 1990s, employment of engineering-related specialists showed an upward pattern; a rather slow growth in engineering employment was compensated by a very steep increase in the number of mathematicians and information technologists employed in the US (National Science Board 2008, 40). Comparison of the employment data with the US engineering enrollment trend, examined earlier in the paper, suggests that even in the 1990s when enrollment was at the lowest level, the US workforce in technology-enabled occupations continued to grow. Nonetheless, it is unclear from Exhibit 7 what percent of increase in the total employment was due to high-skilled immigration to the US.

Exhibit 7. Science and Technology Employment in the US

Source: S&E Indicators 2008, 40.

Immigration, certainly, creates pressure on the U.S. market of IT engineers. The 2008 Job Market Report emphasizes the fact that for the last five years the 65,000 cap for H-1B skilled worker visas has been reached even before the start of the fiscal year (Lee Hecht Harrison 2008, 7). Although not all 65,000 temporary immigrants entering the country annually are going to be employed by the IT corporations, the general trend allows estimating a certain degree of substitution of foreign-born specialists for US engineers. Employment of immigrant high-skilled

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workers by US companies contributes to the challenges faced by the US-born workers. During the six-year period, from 2000 to 2005, over 332,000 jobs were created in the IT sector; this number is compatible to the 330,000 H1-B visa holders entered the country during these six years (2008 Job Market Report 2008, 19). This is another evidence of rigid competition of a worldwide scope in the market of high-skilled labor force.

The National Science Board (2008) in the Science and Engineering Indicators 2008 also stresses the fact that the proportion of foreign born engineers in the US labor force has been increasing since 1990s. Moreover, the higher the level of education, the larger the segment of foreign-born professionals in the total number of high-skilled workers is (National Science Board 2008, 48). This trend raises a question of insufficient supply of US-born engineers in the domestic market or substitution of American workers with cheaper foreigners. However, the reason for that might be the economic expansion that creates enough jobs for both types of workers. By the same logic, when economy goes down in its cycle, both groups of workers experience lay-offs and unemployment.

Another interesting observation can be made based on the following graph. It displays the connection between graduate enrollment in engineering and computer science degrees and unemployment rate in the US.

Exhibit 8. Graduate Enrollment and Unemployment Rate in the US

Source: S&E Indicators 2008, 2-21.

The presented figure demonstrates that employment opportunities in the market have an impact on the enrollment trend – when the unemployment rate is high, more Americans choose to get graduate education at the time when job opportunities in the labor market are scarce. On the contrary, when the unemployment rate goes down, enrollment decreases as well, indicating that people opt for taking advantage of a preferable economic situation. This example also demonstrates that not only high-skilled immigration but also ups and downs of the economic cycle affect employment in the US. Benner (2002) attributes increasing employment opportunities in the 1990s to the economic boom. He notes that during that time, the unemployment rate in Silicon Valley, the largest agglomeration of high-tech industries, was below state and national figures (Benner 2002, 206). Later, in 2000 the economic slowdown had a rather negative impact on the labor market in the region causing the unemployment rate in Silicon Valley to rise from 1.3 percent in 2000 to 5.4 percent in 2001. Benner (2002) finds that in

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2001, the Silicon Valley unemployment rates skyrocketed to levels higher than state-wide and national levels.

The present economic recession in the US explains problems with finding jobs even for high-skilled workers. According to the California Employment Development Department, the unemployment rate in Santa Clara Country, CA was relatively low throughout the second half of the 1990s. As the following graph displays, unemployment substantially increased in the early 2000s followed by the period of relatively low unemployment in 2006-07, but it has been increasing since then (California Employment Development Department 2008).

Exhibit 9. Unemployment Rate in Santa Clara County, CA 1990-2008

Source: data from California Employment Development Department.

Despite the criticism that excess supply of IT specialists in India fuels competition in the domestic market of IT engineers, there is no evidence of decreasing wage rates for IT specialists in the US. On the contrary, between 2005 and 2006, the average salary of an IT engineer increased by 4.74 percent, reaching third highest level of $80,006 in the US (Lee Hecht Harrison 2008, 19). According to the results of the Engineering Income & Salary Survey cited in the 2008 Job Market Report, there has been a 10 percent increase in median salaries for engineers since 2006 (15). The National Science Board (2008) reports one of the highest mean salaries for engineering and computer science specialists in the nation (171).

Exhibit 10. Mean Salaries of S&E Specialists by Field and Level of Highest Degree

Source: S&E Indicators 2008, 171.

Bhagwati et al. (2004) argue that displaced workers will not experience the decline in the wage level as a result of outsourcing, because, while low-wage jobs are moving overseas, the American economy gains from the enforced transition to higher-value jobs (110). The new situation in the market might induce Americans and especially displaced workers to invest their resources in education and training, hence, increasing their productivity and efficiency in the labor market. Jason Bremner, senior analyst of outsourcing services at International Data

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Corporation in Canada supports this argument explaining, “While every organization has unique needs, there is undeniable evidence that outsourcing allows executives to focus on the core business while resolving skills shortages or resource problems, reducing costs, and fundamentally transforming how an organization thinks, acts and operates” (Bremner 2003).

Currently, policymakers and stakeholders observe the market for IT engineers tightening both abroad and domestically. The technical possibility of IT outsourcing creates a growing demand for engineering specialists in India and other countries with comparatively low wages. The previous section of the paper addressed this trend. However, it is important to note that the demand for IT specialists is as high within the US as it is in India. Projections for the year of 2014 prepared by the Bureau of Labor Statistics, presented in 2008 Job Market Report, indicate that five IT professions are among the top ten fastest growing occupations in the U.S. For instance, such occupations as network systems and data communications analyst are predicted to grow by as much as 55 percent from 2004 to 2014. The pool of computer software engineers is expected to expand by up to 48 percent over these years, employing 682,000 graduates alone by 2014 (Lee Hecht Harrison 2008, 12). The forecast made by the Bureau of Labor Statistics in Science and Engineering Indicators 2008 demonstrates that engineering and computer science occupations will be growing in demand over the next decade (National Science Board 2008, 169).

Exhibit 11. Projected Increase in Engineering and Computer Science Employment

Source: S&E Indicators 2008,169.

Forrester Research, Inc., frequently cited as a trusted source of the labor force data, predicts 3.3 million U.S. jobs in nine occupational categories, including but not limited to engineering and computer operations, to be shipped overseas by 2015 (US Congress, House 2003, 2, 80; Engardio et al. 2003). Bhaqwati et al. (2004) claim that the number of the outsourced IT engineers is overestimated, since Forrester Research’s study does not focus on the Mode1 services nor on IT engineers specifically. Moreover, the economic theory of labor demand suggests that workers who lose their jobs for various reasons will either find another job in a different sector of the economy or become unemployed (Bhaqwati 2004, 97). First of all, Forrester Reaserch, Inc., when reported the results of its study, did not explain what would happen to these American workers crowded-out by outsourcing. Secondly, fluctuations in the unemployment rate are subject to the whole set of long-term economic trends, broadly discussed earlier in the paper with regards to changes in the economic cycle. Bhagwati et al. (2004) further explain that 300,000 jobs in nine occupational categories subject to outsourcing, including engineering and computer and mathematical operation, equal in fact only 0.53 percent of 56.7 million jobs existing in these occupations in 2002 (98). Alternatively, outsourced labor may

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replace capital rather than human resources, which will have no effect on employment, or create services that did not exist before in the domestic market (Bhagwati et al. 2004, 110). It is true, however, that crowding-out, or substituting some categories of US high-skilled workers with Indian specialists, and dislocation of certain categories of American workers are very likely to happen. At the same time, while Indians are taking over some segments of the market, the vacant labor in the US gets an opportunity to redirect its skills and energy into higher-value sectors. Profit-maximizing and efficiency-driven firms have come to realization that “the availability of the cheaper low-end skilled workers abroad makes an activity that also uses higher-end skilled workers in the United States financially feasible” (Bhagwati et al. 2004, 99). The research by Engardio et al. (2003) reinforces the previous discussion of the negligible externalities of outsourcing. They believe that a fear of adverse impacts of outsourcing on U.S. labor market gets a stronger emphasis than it should. Engardio et al. (2003) argue that crucial and cutting-edge research and development (R&D) will not go overseas, and many positions that are essential for performing product development will have to stay in the United States. This argument defeats all the claims that the key process of product innovation will shift to low-wage countries.

US Education Policy Implications

Outsourcing is not a threat by itself. The transformation of the global and regional

economies triggered by outsourcing could be dangerous only if the US was not ready to address these challenges. Competition in the area of information technology and software development is, in essence, competition for the best skills, knowledge, and talent. Competition among workers and, hence, substitution are possible only if workers possess the same level of education, acquire similar skills, and are looking for the same type of job. Therefore, the US should be ultimately concerned about losing the skill and education advantage to India and not as much about the present wage differential.

World-wide transformations in the IT industry described in the paper have a profound impact on labor as a major input in the knowledge-based economy. Despite total gains from outsourcing, there will be “losers” in the transition: dislocated workers forced to move into the available market niche. Economic models discussed in the previous section of the paper demonstrate that in case of the shifting supply of IT engineers caused by the addition workers entering the market a certain degree of substitution is inevitable. Some American engineers employed in engineering occupations are increasingly replaced by the qualified and less costly professionals from India, leaving them with a great risk of staying unemployed for a long time. Craig Barrett, the chief executive officer of Intel, cited by Bhagwati et al., states, “India and China will soon have 300 million high-skilled workers and that this situation poses a danger to the U.S. prosperity and to skilled workers in the U.S. economy” (in Bhagwati 2004, 105). American workers are facing a very gloomy perspective – losing more and more of their jobs in the competition with Indians. A public concern over the adverse impacts on the US economy induces policymakers to seriously consider the problem and develop possible measures to address the core of it.

Therefore, if the US pursues the goal to stay competitive, it cannot rely only on the market regulation alone. The IT industry and institutes of higher education preparing engineers and computer science majors feel the urge for the new direction in public policy today. One of

21

the necessary measures that the US authorities will have to undertake is to assist dislocated workers with finding new career opportunities in the market. The problem of vanishing competitiveness may be approached with stricter government regulation, establishing legal norms and quotas to secure jobs for American workers as well as discouraging measures, such as taxation, applied to the companies that are moving their operations overseas. However, none of these solutions can lead to an absolute outcome, if US workers lose their skill competitiveness to workers in the rest of the world. The US government has to recognize the crucial importance of the education policy in ensuring that America sustains its cutting-edge advantage in the global market.

The 2008 Job Market Report reminds that “the talent war is still alive” (Lee Hecht Harrison 2008, 6). More and more actors are challenging the US leadership in producing high-tech goods and services. It implies that their education and professional training systems are extremely successful in replenishing the supply of high-skilled professionals domestically. The US higher education system with support of the federal government has to respond to the challenges posed by outsourcing and globalization in general. In a knowledge-based economy, American workers must enhance their professional skills, if they want to stay competitive in the labor market. Americans also have to be aware what areas of specialization will be in demand in the mid-term perspective. The 2008 Job Market Report calls US policymakers to realize the crucial importance of investment in education and training and act accordingly. The report raises the question “whether our current education strategies are preparing a strong workforce or if we’re losing our competitive foothold globally” (Lee Hecht Harrison 2008, 8).

The recognized attractiveness of Indian graduates and professionals of engineering and computer science must spur the sense of priority that should be given to high-quality technical education in the US. India managed to find resources to create high-class institutes of higher learning in such fields as information technology, mathematics, and computer science. With the help and guidance of the government, India has been rapidly expanding the IT sector and attracting more outsourcing contracts for the growing pool of well-educated engineers and other IT specialists. The Indian government recognizes that, “In order to develop manpower for different areas of the knowledge economy, education and training of information technology is a core prerequisite” (Ministry of Human Resource Development 2008, 168). India enthusiastically pursues the policies set by its education leaders to establish and support all kinds of engineering and technical institutes and colleges throughout the country, to raise the quality of education, and to broaden access to education and professional opportunities with a goal to satisfy the growing demand for technical engineers and software developers in the domestic and international markets. While India is on the right track of investing in its future, the US will inevitably have to adjust its policies in order to retain the comparative edge.

The policymakers have to foresee that the US competitiveness will be lost not when all engineering jobs shift overseas, but when innovation and technological progress begin to occur predominantly offshore and be performed by foreign-born specialists. This alternative highlights the crucial importance of empowering American talent for innovation, leaving implementation of daily tasks to outsourced operators. The idea is not just to boost the enrollment or produce more engineers or software developers than India does. The key goal should be to grow the domestic supply of engineers and information technology specialists, who are able to innovate (Wadhwa et al. 2007). The US needs to invest in its students, in the future high-skilled workers so that they could be employable and competitive in the global labor market.

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India and other emerging powers have challenged US leadership in high-tech industry sustained for decades. Therefore, the objective of the US policy should be to reevaluate and secure the country’s comparative advantage in the long-run. America’s niche lies in the area of high-tech, cutting-edge sectors of the IT industry. It is in the national interest of the US to lead in R&D, to educate the world’s best scientists and engineers, and to keep research and innovation inside the country. The emphasis on education policy as a long-term solution is necessary. America should focus on preparing the high-skilled specialists today, because the demand for them in the market will be very high in the next 10-20 years. During the Hearing before the Committee on Small Business in the US House of Representatives, Bruce P. Mehlman, assistant secretary for technology policy at the US Department of Commerce, pointed out that “improving the education system is not just more degrees. It is higher quality, higher productivity, higher flexibility, and higher creativity” (US Congress, House 2003, 29). He claims that America’s advantage does not lie in services or technology, as it might appear to someone, but it is innovation and ability to apply technology and creativity that strengthen the US position as a global leader (US Congress, House 2003, 22). Unless the US reconsiders its priorities and adjusts the market niche according to its comparative advantage, countries like India will build up the potential large enough to outperform the US.

It is rather misleading to blame outsourcing for all the troubles that have surfaced in the US market for skilled labor. Outsourced Indian labor is a beneficial complement to the US labor force, when it performs routine, but high-tech, operations allowing specialists in the US to concentrate on more sophisticated and high-value responsibilities. Christopher Kenton, President of Cymbic, Inc., specializing in marketing for hi-tech corporations, calls it “differentiating between outsourcing for organizational efficiency and outsourcing for innovation” (US Congress, House 2003, 19). America must hold onto its key advantage in the global market – its powerful ability for innovation. It should also derive benefits from such the division of labor. Assuming the competitive equilibrium in the market is achieved, the biggest risk for the US becomes not the cheaper labor, but Indian workers being able to outperform Americans due to their education and qualifications.

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Conclusion

The study of the driving forces and impacts of outsourcing reveals interesting and

unforeseen trends. India’s comparative advantage in the global IT market is based not solely on its low-wage labor force. A combination of unique characteristics – geographic location to the west of the United States with at least eight time zones difference and the English-speaking population – led India to become the magnet for IT jobs outsourcing. Statistical data reviewed in the paper indicate that, as a result of high-tech industry’s expansion to India’s market, Indian high-skilled workers gain. High-quality technical education emerged as the strongest advantage of the Indian workers, making them more productive and competitive in the global market. IT outsourcing positively affected India’s economy. It enabled the Indian labor market to grow and develop through the creation of well-paid jobs and incentives to attain more education and training for young generation of Indians.

Outsourcing produced benefits for US companies and consumers, but not all of its outcomes have been positive. American high-skilled workers, who occurred to be most substitutable with Indian IT engineers, are filling a growing pressure coming from India and other growing economies specializing in IT-enabled services. However, the myriad of factors affect the employment and wage levels in the US labor market along with outsourcing. The economic slowdown of the past several years has led to rising unemployment and declining wages in the US. Outsourcing, in turn, has an impact on workers’ wages only in the short-run and promotes the overall economic growth in the long term. The increasingly tightening labor market for high-skilled IT specialists gives the US workers extra incentives to raise their productivity, invest in their human capital, and specialize in more valuable work. After all, total gains from outsourcing will always be positive.

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