Outsourcing and Wages

I was in an argument on another blog (which will remain nameless to avoid piling on the author) in which my adversary was arguing that outsourcing was bad for both countries, because it drives US wages down, and foreign wages are low and will never increase. Of course I tried to explain that this was contrary to basic economic theory and observed reality, Micro 101 teaches us that as the demand for labor catches up to the supply, the cost will increase, but the protectionist crowd will not be swayed from their viewpoint no matter how brilliant the argument. In any case I was amused to read in the Wall Street Journal an article that proves my point exactly.

To be sure, some businesses are as yet untouched by the shortages. Marquee local software firms such as Infosys Technologies Ltd. continue to attract more than enough skilled applicants. The rest -- including large U.S.-based competitors -- have little option but to pay high wages to attract employees in fished-out talent pools in big cities such as Mumbai and Bangalore.

India isn't alone in suffering a skills shortage. The U.S. is sliding into one, due chiefly to early retirements by baby boomers and a lack of replacements. A skills drought in China is due partly to the fact that many of its graduates live long distances from the cities where jobs are being created and are unwilling to relocate, McKinsey & Co. says.

The demand for well-trained workers has prompted an explosion in wages for the most experienced Indian personnel. And attrition has reached epidemic proportions as workers job-hop to better salary packages. Pay for tech and banking executives, airline pilots, and engineers -- all sectors experiencing huge growth -- jumped between 25% and 30% in 2005.