Wage Inflation as a Result of Offshoring


Another article from McKinsey…
On the supply side
What, for instance, would be the effect on the wages of engineers in emerging markets if labor costs were the most important factor for US companies choosing offshore locations? Our analysis shows that salary levels for engineers in the lowest-cost countries would likely double (exhibit). But salaries in emerging markets wouldn’t reach the prevailing level in the United States or Western Europe, since they will be capped at about 30 percent of average US wages, or the current level in Brazil and Mexico.
Local wage inflation will probably continue in some offshoring locations as long as the multinationals concentrate their demand in a few cities. Because of the sunk costs of setting up an offshore facility, if demand in that location begins to outstrip local supply, the wages paid by individual companies may rise above the levels prevailing in neighboring countries. Dispersing demand will slow down overheating in the hot spots.
Overall, although wages in the supply-side countries will probably rise, they won’t reach the level of wages in the demand-side countries.
On the demand side
Companies are moving their operations offshore at a slow pace, which means that over the next five years offshoring will have a negligible effect on overall employment in the demand-side countries for the occupations we analyzed.
Consider the impact in the United States. Over the past 30 years, the share of manufacturing jobs in total US employment has declined by 11 percentage points, to 21 percent, from 32 percent. By comparison, we estimate that only 9 percent of all US service jobs could, even in theory, be performed remotely, and it is unlikely that all of them will move offshore during the next 30 years. Wage levels too are unlikely to drop, for the same reason. Indeed, in the United States, growth rates for wages and the number of jobs in computer and data-processing services—a sector where offshoring is prevalent—are higher than those in the economy as a whole.1
This moderate impact and generally slow pace won’t soften the blow for people who do lose their employment to offshoring. A sustained effort to retrain them is likely to yield results, since most of them are college graduates.

I think this is much too narrow a view. There will be another effect as well: wage deflation in the West.
Management consulting firms to always paint a narrow picture without looking at social costs. Let’s talk about this again in three years. Predication: India will eat our lunch, China our dinner, and we’re going to eat one meal a day – breakfast – like the poor in so many third world countries.

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