Arnold Kling  

Indian Labor Productivity

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I'm at a conference put on by the Milken Institute, and hence the light blogging. At one session on outsourcing and jobs, Clarence Schmitz, the CEO of an outsourcing firm, said that they had anticipated needing 1.2 Indian workers to replace one U.S. worker. Instead, they found that they needed 0.8 Indian workers to replace one U.S. worker.

For Discussion. What does this portend for the future ratio of wages between Indian and U.S. workers?



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The author at AspiringBuddha in a related article titled The Next Big Thing in Outsourcing? writes:
    In his ongoing saga of "Markets in Everything", Tyler Cowen at Marginal Revolution spotlights the market for Imaginery Girlfriends. I wonder whether, once the dust settles in the Tech/Call Centre Outsourcing debate, this could be the next big thing out... [Tracked on April 28, 2004 7:38 AM]
The author at The Acorn in a related article titled 1 Indian worker = 1.25 American workers writes:
    So reveals Arnold Kling from what he heard at a conference this week. There's a good discussion out on his blog EconLog. Another factor is how much of this is simply picking the low hanging fruit? I'm sure the best Indian doctor is better than the aver... [Tracked on April 30, 2004 9:56 PM]
COMMENTS (14 to date)
Silent Bob writes:

My first reaction was "Oh, my... the sky is falling. Where will my family live when I become displaced?" Then I started thinking:

1. CEOs of outsourcing firms are like lawyers. The only time they are lying is when their lips are moving.

2. Was he talking about call center outsourcing or full-fledged J2EE development? My guess is call center.

2a. If it IS call center: Who works at call centers in the USA? People who have no college degree generally. Absenteeism, turnover, etc is rampant and wages are REALLY low. Of course you can replace 1 of them with .8 of a college educated Indian who REALLY wants to work as a call center person.

2b. If he's talking about J2EE development, I'm in trouble and should start asking for work from family members to keep food on the table.

3. If you've got the right person, you can replace 20 Americans with him. So Mr. CEO gets to cherry pick the .8 of an Indian from PHDs, etc, while laying off the 60 year old dude who has been "doing his job" just long enough to get a pension. Then he goes and spouts off to a bunch of Econo-types about how much of a genius he is. PLEASE.

4. Yes, Indian wages will rise.

5. Yes, American IT wages will continue to fall as they have for the last 4 years since GWB took office.

6. Yes, GWB will face a wave of disgruntled displaced IT workers in November, and will find himself wrongfully displaced. He is not at fault for this, but he will get the blame.

7. If Indian IT workers are so productive and so great, where is my copy of Windows for $5 at Best Buy? Where is my copy of MS Office written by Indians for $20? Where's my copy of ANYTHING written in India?

8. Again, CEO salesmanship, ESPECIALLY in the outsourcing world is NEVER left at the door. He will say ANYTHING to get a sale!

9. Maybe you should ask the CEO how much rework was needed? How satisfied his customers were? How expensive land, electricity, water, and telephone lines are in the cities he ships American jobs off to. Outsourcing is NOT as cheap as the heads of IBM, EDS, and Infosys say it is. It's only a matter of time before the CEOs of P&G, General Motors, et al find this out, too.

Silent Bob

Boonton writes:

Another factor is how much of this is simply picking the low hanging fruit? I'm sure the best Indian doctor is better than the average American doctor. The best Indian mathematician is probably better than the average American one. The best Indian soccar player is probably better than the average American.

It doesn't follow from that that the average for all Indian doctors, mathematicians, soccar players is as impressive. If I was opening a hospital in India, I may hire 'the best' Indian doctors and find that I could run it with 80% of the staff than if I had used average American doctors. It doesn't follow, though, that I could run every hospital in India with 80% of the staff!

Mcwop writes:

People will have to work harder. Jobs are not only getting outsourced but "insourced" too. Immigrants are coming to the U.S., getting citizenship, and then working their tails off. On my programming team there is one Indian, one Chinese guy, and a russian guy. All are recent immigrants. I can only say that the Chinese guy lives at work, and codes faster than the bionic man.

Brad Hutchings writes:

Grrrr... I agree with Silent Bob that our outsourcing CEO is just flapping his gums. Let's see his numbers. To me, it sounds like he is reacting to reaction against what he does with a "yeah, and we're more efficient too (so bite me)".

I disagree with Mcwop's conclusion that we have to work harder. We have to work smarter. If your cow-orker is glued to the computer grinding out source code 12 hours a day, he's not working smart. He's not a craftsman. Hopefully you are, can work more intelligently and efficiently, and will define your value by what you get done right rather than how little of a life you have.

As for Arnold's question... where Indians are providing cheap unit labor and Americans are providing value, the ratio will remain about the same with variation in employment levels as the dynamic evolves and managers figure out what works with outsourcing and what needs to be done in-house. They are still going to have to pay a premium for highly skilled and thoughtful workers.

-Brad

Praveen writes:

The capabalities of an average engineer in India is
evident from the fact that many Product companies like
Microsoft, Intel, HP, Cisco, Sun, Novell etc have not only
opened huge offshore R&D centers but are developing and
packaging some of their products completely from India

The biggest "pro" for Indians is lower cost for skillful
engineering, but the reasons for not seeing any successful products
from India can be because of

- lack of expertise in product development and management
(the Indians capable of doing this are still in U.S)
- being far from the world market
- absence / unrealized domestic market
- yet to see a successful product story from India
(might take few generations of startups before we might see a big one)
- strong culture for service industry; few believe in riskier
venture of product development
- Indian Economy (should change soon)
- lack of good network of business schools (unlike engineering)

In the log run, i do not see how offsoring can affect U.S economy while
the idea is to improve it

- entrepreneur from Bangalore, India

Mcwop writes:

Brad writes:

If your cow-orker is glued to the computer grinding out source code 12 hours a day, he's not working smart. He's not a craftsman.

Bold statement from someone who does not know this guy. He enjoys it - some people do enjoy their work. Further, he had little in China, and has a different perspective. I'd add that he is an excellent craftsman.

Regardless, my point is that something similar to outsourcing is happening through immigration (probably on a much larger scale). Americans are competing more for jobs every day, whether it be with immigrants or people located in their home country.

Mcwop writes:

Program note: Tonight's episode of South Park is about aliens who take the jobs of American citizens. 10pm on Comedy Central. Should be good.

Eric Krieg writes:

The company I currently work for (for another week, at least) has so much as said that the future is in India. This company is mostly staffed with Chemical Engineers, and there simply aren't enough ChemEs graduating from US schools to competitively staff the company.

That's why I don't think that outsourcing to India and China is simply a cost cutting move. The Indians and Chinese are coming to the table with a different skill set than Americans.

Arnold Kling says: Clarence Schmitz, the CEO of an outsourcing firm, said that they had anticipated needing 1.2 Indian workers to replace one U.S. worker. Instead, they found that they needed 0.8 Indian workers to replace one U.S. worker

Silent Bob says "CEOs of outsourcing firms are like lawyers. The only time they are lying is when their lips are moving."

Full disclosure: I'm the CEO of an outsourcing firm and I hope that I'm an exception to Silent Bob's broadside [LOL].

That having been said, the 0.8 Indian workers = 1 Indian worker equation is an exception (IF it's true in the first place).

THERE'S NO WAY IT HOLDS UP ACROSS THE BOARD, especially as tasks grow more complex (I say this based on my outsourcing experience and an Indian who has worked extensively in both cuntries).

It may be true in data entry or call center jobs but in high-end software/ research it's probably 1 American professional = 2 Indian workers (if that).

If Schmitz is speaking the truth, I suspect the two samples are drawn from different pools -- comparing the best-educated/ qualified people in India with the average-educated/ qualified worker in America.

America, not to worry.

John Thacker writes:

OTOH, this New York Times article has quotes asserting that "The cost savings in India were three to one," Mr. Ittycheria said. "But the difference in productivity was six to one" for more complex programming jobs.

Hunter McDaniel writes:

From my experience, I see no justification for the idea that it's only economic to offshore the simple, repetitive tasks. The Indians I have worked with are every bit as talented and innovative as Americans, perhaps more so since as others have noted they may represent a higher slice of the population; and with 4x our population they will not run short of Merit Scholars to work IT jobs anytime soon.

The only nugget of truth here is that the simpler tasks are easier to define and communicate across cultures between the customer and the team doing the work. This is really a problem with "granularity" in the outsourcing process. Over time, look for the Indian firms to take on bigger and more complete pieces of work, or to compete with full-fledged software packages of their own.

Tommy Vercetti writes:

CEOs of outsourcing are very partisan and biased sources on the topic. And if you asked some disgruntled worker or union leader you'd probably get very different numbers.

rvman writes:

>CEOs of outsourcing are very partisan and biased
>sources on the topic. And if you asked some
>disgruntled worker or union leader you'd
>probably get very different numbers.

Yes, true. Very partisan and biased numbers based even less on experience and reality than the CEO's numbers. There is at least a chance the CEO knows what he is talking about. We have no reason to expect individual workers to have good statistics on anything, especially "disgruntled" (read: Unemployed) ones.

gEEk writes:

I work in the electronics / embedded industry in silicon valley and have had a chance to observe what's happening locally. I think the big problem with India/China is the lack of a friendly legal system and culture as well as government corruption. Both countries simply do not respect IP and there is no enforcement mechanism available to companies. Until they do, companies will not want to outsource projects that could be knocked off there. Also note that the fact that many businesses pirate software means that there is not a very large local market for software companies to start selling into and developing products for. I remember seeing a software developer I bought some specialized software for complain that half his downloads were from India but none of them paid for the non-trial version and presumably cracked it versus his fifty paying us and european customers.

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