Arnold Kling  

Cost-of-Living Arbitrage, II

Nanotechnology and the Great R... Collective vs. Individual Bene...

I received a lot of pushback on my earlier post. Comments and email have pointed out that (a) the cost of living really is five times lower in India and (b) Indian expatriates are indeed moving back home to take advantage. Some links:

Columnist Rajeev Srinivasan writes,

a salary of about $20,000 in India -- the going rate for a project manager -- is roughly equivalent to a $100,000 salary in California in terms of standard of living; therefore Bangalore is looking increasingly attractive to the Indian diaspora, especially those of us who live uncomfortably 'under two flags'.

The Times of India has an article on NRIs (non-resident Indians) returning home.

Rohit Kumar, Vice President and COO, Global Energies and Utilites Practice at Wipro, is one such person. A business graduate from Wharton, Rohit worked in Oracle, US for five years in a senior position, before he decided to return to India.

“The most important decision that persons like me have to make when we decide to come back is being willing to settle for a third of the salary we used to make. But the advantages of coming home outweigh the disadvantages by far. You are close to your family and you can lead a much better lifestyle than you would abroad.

This reprinted New York Times article says,

Of the 1,400 engineers who work in Intel Technology India, nearly 10 percent are repatriated Indians who have spent significant time working abroad. Mr. Sampat of Intel is a naturalized American citizen who returned to India less than a year ago, after 17 years with Intel in Portland, Ore., and 3 after that in Singapore.

Some repatriates who hold top jobs, like Mr. Sampat, work at salary levels comparable with executives in the United States.

But others, who move of their own volition, may take significant cuts in pay, bringing their compensation closer to Indian salaries. Evidently, the opportunity to return home, and the lower cost of living, make the tradeoff acceptable.

The International Herald Tribune reports,

According to India's software trade body, the National Association of Software and Services Companies, about 5,000 technology professionals of Indian origin with more than five years of work experience have moved back to India from the United States in the last two years

The IEEE reports,

Incentives to stay at home in the first place also may be stronger: statistics from the India Institute of Technology in Mumbai suggest that whereas more than half used to leave India after graduation, now the proportion is closer to two-fifths.

This article in the Financial Express describes headhunters starting to recruit workers from overseas to come to India. Thus, we could see Indian workers complaining about this foreign competition!

Sums up Mr Shenoy, “At this moment the numbers are too small, However, if the trend becomes a deluge and the foreigners start competing with Indians for the same jobs, the insecurity of the Indian job seekers might become a reality.”

Thanks to various readers for all of the pointers.

For Discussion. What do these stories suggest about the process by which labor markets converge to equilibrium?

COMMENTS (5 to date)
Alex writes:

It may be true that many Indian workers have returned home from the US, but saying that cost of living is the driving factor might be inaccurate. With certain types of work permits, if a worker is laid off they must leave the US. So the economic downturn may have forced many people to leave whether they wanted to or not.

Dave Sheridan writes:

With respect to India, I don't think the " equilibrium" part is too important for the next few years. After all, Indian costs of living are going to be more the product of their domestic economy than by that currently small (but growing) sector that is tied more closely to the U.S., Europe and Japan. What that means in the short term is that Indians returning there with project management and certain other key skills are going to be able to live quite well.

Competition for those with the highest skills will bid up wages, but relative costs of living don't need to be the primary driver. Remember what happened to the cost of a good C++ programmer here at the height of the dot com bubble. We can expect supply (through their education system) to grow as well, with the appropriate lags.

If as the Financial Express suggests, India begins to recruit from still cheaper countries, it could be a long time before wage pressure by itself moves things toward an equilibrium with wages here. The more interesting question is how our displaced work force will be redeployed.

Eric Krieg writes:

A "California lifestyle" on $20,000 per year? I wonder for how long.

The one thing India is deficient in is infrastucture. I've never been there, but I suspect the supply of "California style" housing is limited. If NRIs are moving back, either that limited supply is going to get bid up in price, or they are going to need to build A LOT of new western style housing.

Lawrance George Lux writes:

It states differences in lifestyle is not significantly worse, except for Population crowding. It provides another statement Returnees do not expect real equilibrium anytime soon. The expectation that Labor is overstaffed in India is false, while connection with foreign markets will not destabilize the Indian price structure. General Consensus (by the Return movement) holds no real equilibrium will be reached. lgl

Madhukar Talele writes:

Equilibrium in labor seems inevitable as from the perspective of the returning NRI the trade off between lower salary and better standard of living is more tilted towards latter. From the perspectives of the indian industry, more particularly IT to survive competition with outside economies the local companies too will have to raise competitive skill of local recruits to global competitive level or the local education system too will respond to this. Secondly entrepreneurship in developing countries with large population always has fine quality entrepreneurship not only in today's dot com boom like Murthy of Infosys but also Ambanies of Reliance, Bajaj of Bajaj Auto etc. in even manufacturing industries. This will also expedite the labour equilibrium.

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