India's Blessed Labor

You hear more about it every day: India is becoming a force in the white-collar labor market. Just today, Forbes highlighted this trend in "Blue-Chip Companies Send Jobs to India." Some of the big names hiring more in India include General Electric (NYSE: GE  ) , Microsoft (Nasdaq: MSFT  ) , IBM (NYSE: IBM  ) , Oracle (Nasdaq: ORCL  ) , Bank of America (NYSE: BAC  ) , and JP Morgan Chase (NYSE: JPM  ) .

Just as China has become the de facto home of low-cost manufacturing, so India is becoming the site for low-cost, highly skilled services, including software programming, engineering, and accounting. As detailed by Forbes, India's professionals are well-educated, English-speaking, and willing to work for a fraction of the salary demanded by comparable American professionals.

So is India a "threat to American jobs"? Should American white-collar professionals be scared? Should you be frightened as an investor concerned about the American economy?

Respectively, the answers are: yes, maybe, and no. Only on the surface can India's low-cost labor be considered a "threat." Yes, in the short run, some American professionals will lose their jobs, and their plight cannot be overlooked. At the same time, the long-run efficiency gains of shifting work to India will result in not less, but more U.S. employment.

That lost jobs, through productivity gains, can result in higher long-run employment is one of the fundamentally misunderstood paradoxes of economics. The misunderstanding dates back to the Industrial Revolution when English stocking knitters rioted upon introduction of the new stocking frame machinery that made obsolete their manual labor. If only those rioters had realized that within a century, employment in the stocking industry would expand by one hundred fold.

Economist and author Henry Hazlitt does a brilliant job explaining this phenomenon in his classic book, Economics in One Lesson. His insights on "the curse of machinery" apply equally well to what might be perceived as "the curse of low-cost jobs in India." Consider Hazlitt's example of a clothing manufacturer who introduces labor-saving machinery:

After the machine has produced economies sufficient to offset its cost, the clothing manufacturer has more profits than before. ... At this point, it may seem, labor has suffered a net loss of employment, while it is only the manufacturer, the capitalist, who has gained. But it is precisely out of these extra profits that the subsequent social gains must come. The manufacturer must use these extra profits in at least one of three ways, and possibly he will use part of them in all three:

1) he will use the extra profits to expand his operations by buying more machines to make more coats; or,

2) he will invest the extra profits in some other industry; or,

3) he will spend the extra profits on increasing his own consumption.

Whichever of these three courses he takes, he will increase employment. [emphasis mine]

So you see it all comes down to having a right understanding of corporate profits. Those profits that are so often deemed evil are actually the only true engine of job creation.

As was the case with Hazlitt's hypothetical clothing manufacturer, Corporate America's hiring foray into India will ultimately have the same impact: higher U.S. employment. Yes, there will be dislocated American professionals in the short-run, and their needs should be tended to. But the answer isn't a government blockade against hiring in India.

It would be the height of short-sighted folly to think of India's low-cost service sector as anything but a blessing. Out of the increased profits that result, American companies will have the resources to expand elsewhere and thereby create more U.S. jobs.

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