– Sizing the emerging global labor market

ANother article on Offshoring and the size of the labor market!

The topic of offshoring generates extreme differences of opinion among policy makers, business executives, and thought leaders. Some have argued that nearly all service jobs will eventually move from developed economies to low-wage ones.1 Others say that rising wages in cities such as Bangalore and Prague indicate that the supply of offshore talent is already running thin.2

To a large extent, these disagreements reflect the confusion surrounding the newly integrating and still inefficient global labor market. Much as technology change is making it possible to integrate global capital markets into a single market for savings and investment, so digital communications are giving rise to what is, in effect, a single global market for those jobs that can now, thanks to IT, be performed remotely from customers and colleagues.

The newly integrating nature of this global labor market has strategic and tactical implications for companies and countries alike. Information and insight about it are sparse, however, and executives and policy makers have little of either for making the decisions they face. To provide help for governments and companies in both high- and low-wage economies, the McKinsey Global Institute (MGI) analyzed the potential availability of offshore talent in 28 low-wage nations and the likely demand for it in service jobs across eight of the developed world’s sectors (chosen as a representative cross-section of the global economy): automotive (service jobs only), financial services, health care, insurance, IT services, packaged software, pharmaceuticals (service jobs only), and retailing. These sectors provide about 23 percent of the nonagricultural jobs in developed countries. The study, which projects trends to 2008, aims to assess the dynamics of supply and demand for offshore service talent at the occupational, sectoral, and global level and thus the likely impact on both employment and wages in the years ahead.3 (The full report, The Emerging Global Labor Market, is available free of charge online.)

MGI’s analysis provides a panoramic view of the offshoring of services, as well as a number of useful conclusions, including:

Offshoring will probably continue to create a relatively small global labor market—one that threatens no sudden discontinuities in overall levels of employment and wages in developed countries.
Demand for offshore labor by companies in the developed world will increasingly push up wage rates for some occupations in low-wage countries, but not as high as current wage levels for those occupations in developed ones.
Potential global supply and likely demand for offshore talent are matched inefficiently, with demand outstripping supply in some locations and supply outstripping demand in others.
The more efficiently the emerging global labor market functions, of course, the more value it will create for its participants by allocating resources more economically. Both companies and countries can take specific measures to raise its efficiency in clearing demand and supply.

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