Remember when they were going to take all our jobs?

by Russ Roberts on April 8, 2007

in Trade

The AP reports in the Boston Globe (HT: Wizbang) that the IT industry in India has troubles. First problem, not enough workers. That is, trained workers:

Nearly two decades into India’s phenomenal growth as an
international center for high technology, the industry has a problem:
It’s running out of workers.

There may be a lot of potential –
Indian schools churn out 400,000 new engineers, the core of the
high-tech industry, every year — but as few as 100,000 are actually
ready to join the job world, experts say.

Instead, graduates are
leaving universities that are mired in theory classes, and sometimes so
poorly funded they don’t have computer labs. Even students from the
best colleges can be dulled by cram schools and left without the most
basic communication skills, according to industry leaders.

The second problem is rising wages:

A shortage means something feared here: higher wages.

Much of India’s success rests on the fact that its legions of software
programmers work for far less than those in the West — often for
one-fourth the salary. If industry can’t find enough workers to keep
wages low, the companies that look to India for things like software
development will turn to competitors, from Poland to the Philippines,
and the entire industry could stumble.

Actually, this is a feature, not a bug. When your services are in demand, wages rise. That’s GOOD for India, at least for Indian workers of which there are many. And that won’t in turn cause the Indian IT sector to collapse.

That confuses demand with quantity demanded as in the following exam question. True, false or uncertain: "If demand for Indian workers increases pushing up their wages, the higher wages will destroy the demand for Indian workers." The first part of the statement is true. An increase in demand will increase wages. But that’s a movement along the supply curve to a new equilibrium. The higher wages don’t cause the demand curve to shift back down. An increase in wages causes a reduction in quantity demanded, not a shift in the demand curve.

The problem in India which the reporter, Tim Sullivan recognizes, is lousy schools. (Hmm, I wonder if they’re public or privately run?)

Much of the problem is rooted in a deeply flawed school system.

As
India’s economy blossomed over 15 years, spawning a middle class
desperate to push their children further up the economic ladder, the
higher education system grew dramatically. The number of engineering
colleges, for instance, has nearly tripled.

But the problems have simply grown worse.

India
has technical institutes that seldom have electricity, and colleges
with no computers. There are universities where professors seldom show
up. Textbooks can be decades old.

Even at the best schools — and
the government-run Indian Institutes of Technology are among the
world’s most competitive, with top-level professors and elaborate
facilities — there are problems.

The brutal competition to get
into these universities means ambitious students can spend a year or
more in private cram schools, giving up everything to study full-time
for the entrance exams.

Instruction is by rote learning, and only test scores count.

"Everything
else is forgotten: the capacity to think, to write, to be logical, to
get along with people," Pai said. The result is smart, well-educated
people who can have trouble with such professional basics as working on
a team or good phone manners.

The private response:

The biggest companies have built elaborate training centers. The
Mysore campus, for instance, was little more than scrub-filled fields
when Infosys, India’s second-largest software firm, based in the nearby
technology hub of Bangalore, began building here in earnest three years
ago.

In America, the campus would be nothing unusual. But in
India — with its electricity outages, poverty and mountains of garbage
– the walled-in corporate fantasyland, watched over by armed guards,
is anything but normal.

It has 120 faculty members, more than 80
buildings, 2,350 hostel rooms and a 500,000-square-foot education
complex. There’s a movie complex built inside a geodesic dome. An army
of workers sweeps the already-spotless streets and trims the
already-perfect lawns.

Month by month, it’s getting bigger.
Today, some 4,500 students at a time attend the 16-week course for new
employees. By September, there will be space for 13,000.

Infosys
spent $350 million on the campus, and will spend $140 million this year
on training, said Pai, the human resources chief.

"This is the enormous cost we have to pay to ensure we have enough people," he said.

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{ 24 comments }

jn April 8, 2007 at 6:44 pm

Behold, the sky has not fallen, and the rest of the world does not defy the fundamental laws of economics.

ben April 8, 2007 at 7:00 pm

I read this post and felt inspired by it, which I suspect is the opposite of what the quoted author intended. The impression I get is that India is rapidly on its way to the wealth of western economies, with the quoted article pointing out some growing pains along the way.

If employers value interpersonal skills and hire according to ability in that area among others, then there is every reason to expect students to shift demand to schools that offer training in interpersonal skills, and schools to respond by increasing the supply of that training. It might take a bit of time if governments are running these schools.

Xmas April 8, 2007 at 11:02 pm

As an IT worker who loves off-shoring this is great. It means that the Indian marketplace is about ready to be self sustaining.

The big problem with Indian workers though is cultural. They will do exactly what you ask them to do. Even if what you ask them is wrong. After a few years working in the US, they get over this though.

Tim April 9, 2007 at 1:29 am

Well besides rising wages and trade training bottlenecks there are other infrastructure bottlenecks limiting India's performance here.

My company explored the outsource trail in India and found it unexpectedly narrow. In particular general services like electric power reliability and the poor quality of India's airport / aviation infrastructure were a problem.

We needed to be able to move personnel in and out of India by air back to the west safely, reliably and comfortably, and this was a problem. There are inter-cultural (see here) and legal risk issues (see here )as well.

There is an article here discussing the "myth" that Indian call centers are more productive. My guess is it's a "half truth" rather than an outright "myth".

Martin April 9, 2007 at 4:19 am

Interesting post.

1. Presumably Bill Gates will have to look elsewhere to get all those software engineers he wants to import in order to artificially depress his paybill (if you want to feed the world, Bill, hire an American – and pass on the good news to Bono), because it looks like Indians are less skilled than Americans. No more Indian immigration; that's that one solved:
2. Hmmm…can't someone be, like, you know…sued for sending confidential data to a nation whose people don't all have flushing toilets? I mean, it's all well and good that India is on 'the path to riches' (it never ceases to amaze me just how the prospect of Indians getting richer animates economists far more than the concept of Americans becoming poorer: I don't get it), but not long ago my church was visited by a lady who worked for a leprosy charity, and who gave a talk on how leprosy is still prevalent there. This is a country that still has leper colonies, for goodness' sake! While I have no problem putting my hand in my pocket to help buy a $21 vaccine, it galls me that the UK's richest resident, Lakshmi Mittal, is sitting on riches beyond the dreams of avarice while his countrymen are still contracting leprosy. Why is it my duty to relieve their suffering – but not his?

ben April 9, 2007 at 9:19 am

An exceedingly snobbish post, Martin. I can't work out whether its the poor you don't like, or Indians, or just all non-Americans in general.

mobile April 9, 2007 at 10:15 am

It's like Yogi Berra used to say: "Nobody uses them anymore because their services are too highly valued."

Dennis Mangan April 9, 2007 at 10:21 am

"An exceedingly snobbish post, Martin."

Why? For pointing out the obvious? We've been told for years now just how badly we need all those Indian H-1B visa workers, and how the American economy wouldn't be the same without them. Yet plenty of software engineers can't get work.

Isaac Crawford April 9, 2007 at 11:25 am

Martin Wrote:
:( it never ceases to amaze me just how the prospect of Indians getting richer animates economists far more than the concept of Americans becoming poorer: I don't get it),"

Well, if the US were to start getting poorer (which we're not at all) at the same rate the Indians are getting richer, you'd see a lot of economists jumping up and down… India is making great strides, your complaints about their level of poverty should encourage more Indian hiring, not less.

Isaac

ADR April 9, 2007 at 12:06 pm

Ben,

You're clearly missing the point. The author DOES want you to be inspired, at least in the sense that all of out anti-outsourcing paranoia is proving to be unjustified. The author clearly is not anti-Indian in any way.

Martin,

No one's asking for a handout when it comes to the sourcing issue – simply a chance to do a job. The anti-outsourcing crowd wants us to not give them jobs even if they can do it better for less $$$.

Dennis,

Your point that somehow there's all these competent American software programmers running around unemployed while we bring Indians in is, of course, nonsense. Why would any company hire an attorey and go through the awful H1B visa process? If the work's done over here we need to pay prevailing wages, so simply paying less isn't the answer.

Bottom line – today I can get competent computer help at 9:30 pm after the kids are in bed. Yes, the world's a better place.

Martin April 9, 2007 at 12:35 pm

Ben,

Snobbery, like love – is not a crime!

Although I can't work out why you're projecting this concept on to me.

Isaac,

I don't agree with you. The abolition of the caste system and the eradication of sex-selective abortion might do more to help India grow than just exporting Indians.

Unless you're a remittance monger, in which case exporting Indians is a good idea – although it removes any incentive the Indian government might have to get its house in order.

Dennis Mangan April 9, 2007 at 4:09 pm

"If the work's done over here we need to pay prevailing wages, so simply paying less isn't the answer." Sorry, but that's incredibly naive. Your average Indian programmer who's tied to a specific employer via H-1b visa will gladly take 25 grand a year over deportation.

ben April 9, 2007 at 4:48 pm

Martin, perhaps I'm missing an attempt at humour, but objecting to hiring workers in a country where not everyone has flushing toilets and "still has leper colonies, for goodness' sake" sounds like snobbery. It certainly seems off-point.

Sanjiv April 9, 2007 at 5:40 pm

"Your average Indian programmer who's tied to a specific employer via H-1b visa will gladly take 25 grand a year over deportation"

Now, who is being naive?

http://www.dol.gov/esa/regs/
statutes/whd/0003.iana.htm

What you have suggested above is illegal if that 25 grand a year (in your hypothetical example)is lesser than "actual wage level paid by the employer to all other individuals with similar experience and qualifications for the specific employment in question" OR "the prevailing wage level for the occupational classification in the area of employment"

If the employer violates this clause -paragraph (1)A in that link- his pending appications to hire aliens will be frozen for the next three years. There are also monetary penalties. I am no expert, am just pulling out these facts from that link. If I have misinterpreted them, feel free to correct me. Does anyone know of studies/research that uncovered employers breaking these laws (am talking about H1-B in particular) in order to hire aliens for lesser salaries?

Dennis, can you give me a citation for your claim about that 25 grand? Do you know of a study/survey that concluded the average Indian programmer will settle for 25 grand
instead of being deported?

another bob April 9, 2007 at 11:38 pm

Three reasons it's difficult to find qualified techies in India (I know I worked on this for two years):

1. Transportation infrastructure is non-existent at best and dangerous most of the time. So, where in the US you might be able to recruit from a 20 to 40 mile radius of the job location, India is more like 5 to 10 miles.

2. Various human resources studies show that software engineering requires a level of abstract reasoning associated with an IQ of 115 minimum; approximately 1 standard deviation above average, 100. Check out avg IQ by country here http://en.wikipedia.org/wiki/List_of_countries_by_IQ For India, 115 is more than 2 SD above average.

3. A huge percentage of the 1.1B souls in India are under 15. My experience is that 22 is a bare minimum age for good engineers.

Compare this with Lynn and Venha

happyjuggler0 April 10, 2007 at 1:03 am

mobile,

That reminds me of the line that "nobody goes there anymore because it is so crowded". Or perhaps you were paraphrasing Yogi.

It all adds up to the same thing, there may be a ceiling on wages whereby it doesn't make sense to hire any more, but that doesn't mean that anyone who is qualified but unemployed or underemployed will be unable to get a good job. The very fact that the ceiling has been reached means by definition that there is high demand for such workers.

The ceiling can be raised by more training, or by relevant education if you will. Therefore the wage ceiling isn't permanent. As others have noted, India's real problem is crappy roads, crappy electricity (i.e. not nearly enough, nor enough in the pipeline being built), insufficient seaport and airport space. To which of course is the inadequate education system that is mentioned all over this thread, and one finally comes to the root of all the problems, namely that India has yet to shed its dysfuncional state antipathy to free markets and profits, especially if foreigners make some of those "unseen" prfoits that are unseen because they exist in an alternate future that isn't going to happen any time soon.

Dennis Mangan April 10, 2007 at 3:46 am

Sanjiv: The United States allegedly has a border too. Doesn't mean it's enforced.

Sanjiv April 10, 2007 at 8:20 am

Dennis: Your analogy isn't good enough. Just because a particular law can be broken is not evidence that it is being done so routinely.
When ADR said,
"If the work's done over here we need to pay prevailing wages, so simply paying less isn't the answer",
he knew what he was talking about. Your response was to call him naive which to me indicated that you have probably read of instances where employers were willfully flouting the laws. So, I repeat: If you have read (or personally know of) any such instance, please feel free to share it with us. Else, I must conclude that you don't know what you are talking about.
I am from India and feel absolutely no obligation to defend illegal practices irrespective of who is benefitting from them. All the same, I would like to know if the hiring of aliens (on H1B, that is) for lesser pay is just rhetoric or has been substantiated.

Sanjiv April 10, 2007 at 8:38 am

Oops. Please replace "he knew what he was talking about" with "he/she knew what he/she was talking about." My apologies.

Dennis Mangan April 10, 2007 at 11:45 am

Sanjiv: That "he/she" thing was hilarious. As for H-1B visas, here's what no less than Alan Greenspan recently said: "Allowing more skilled workers into the country would bring down the salaries of top earners in the United States, easing tensions over the mounting wage gap, Greenspan said.

“Our skilled wages are higher than anywhere in the world,” he said. “If we open up a significant window for skilled workers, that would suppress the skilled-wage level and end the concentration of income.”

Income inequality has risen in the past three decades."

http://blog.vdare.com/archives/
2007/03/26/matloff-on-greenspan-on-
deliberately-lowering-american-tech-
workers-earnings/

Sanjiv April 10, 2007 at 12:52 pm

"That "he/she" thing was hilarious."

Oh that…
I have my undergrad sociology lecturer to thank for that one. In an answer to a question, I had used "he" throughout and when I got back my graded answers, every single occurence of "he" had been modified to "he/she". Have been traumatized since then.

Will check out that link.

Sanjiv April 10, 2007 at 5:35 pm

"If we open up a significant window for skilled workers, that would suppress the skilled-wage level and end the concentration of income.”

According to Wiki, H-1B caps started to be reached around mid 1990s. So, it has been quite some time since a "significant window" for skilled workers has been opened. How has the skilled-wage level moved over the past 10-12 years? Does somebody know of reliable links/stats? If the skilled-wage level over the past 10-12 years hasn't decreased noticeably, then Greenspan's statement is suspect. Agree?

Sanjiv April 10, 2007 at 5:42 pm

http://www.myvisajobs.com/
reports/
Occupation/2005_h1b_visa_occupation.pdf

Has a staggering break up of average salaries for different fields coming under H-1B.

Nigel April 12, 2007 at 10:49 am

Martin:

The lady who visited your church is very likely exaggerating things to boost collection. I am Indian, and have never heard of a leper colony in India.

Interestingly, Wikipedia (http://en.wikipedia.org/wiki/Leper_colony) says that there are leper colonies in the US. I cannot vouch for its accuracy, though.

Also, for the record, both caste-based discrimination and sex-based abortion have long been illegal in India. In both cases, it is difficult to enforce this 100% since people's behavior will change only slowly. Are race-based and sex-based discrimination completely non-existent in the US?

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