Professional Documents
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Olga Kolodina
Public
Policy
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.
India is a New Frontier for Growing IT Industry. Challenges to the US Labor Market Posed by
Outsourcing.
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 arms-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
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 bachelors 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.
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 Indias economic development (Norton
2005, 48).
Business process outsourcing (BPO) in the IT sector of Indias 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 Indias 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 Indias perspective and calculate the number of IT jobs
created in India alone as a result of outsourcing. Data available from Indias 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 Indias 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
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 Indias 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 O2O2 on the horizontal axis. The increase in supply of labor (distance
O2O2) 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
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 Indias 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 Indias 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
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
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 worlds lowest wages
secured Indias 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).
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 worlds 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 markets 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.
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 Indias 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
countrys economic development, because it is higher education that is primarily responsible for
advancement and competitiveness of the countrys 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 worlds 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.
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.
w
w1
D
Employment
E1 E0 E2
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.
D D'
Employment
E1 E2
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 Indias 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
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 10. Mean Salaries of S&E Specialists by Field and Level of Highest Degree
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
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 were 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.
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 countrys comparative advantage in the long-run. Americas 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 worlds 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 Americas
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.
Conclusion
The study of the driving forces and impacts of outsourcing reveals interesting and
unforeseen trends. Indias 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 industrys expansion to Indias 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 Indias 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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