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March 23, 2007

The yawning salary gap

Steve Hamm

There's so much talk about tech industry salary inflation in India. And there's no question that it's a problem--both for India's competitiveness with other low-cost countries and, day to day, for companies that are fighting it out on the ground for talent. But my checks with a handful of data sources suggest that the wage differential between the United States and India will remain substantial for a long time.

A survey from Dice Holdings, an online recruitment company, showed that IT salaries in the US increased 5.2% last year to $73,308. Engineers with in-demand skills get paid even more handsomely: ERP: $96,161; CRM: $90,499.

In India, IT leaders say, salaries for software programmers are rising at about 15% per year. Sounds high until you see the base those numbers are coming off of. Survey data from PayScale, another online recruiting site, show software programer pay averaging $8,200 in the state of Karnataka, where Bangalore is located. In Tamil Nadu, where Chennai is fast becoming a tech hot spot, the average is $5,800.

If you do the math you see that the average US tech employee's pay increase was more than half the total pay of an Indian programer in Tamil Nadu. At that rate, it will be a couple of decades before Indian pay scales draw close to those in America.

10:58 AM

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Wages in US dollar equivalents? You miss the point!

The cost of living is so substantially lower in India that one has to use, not a dollar to dollar basis, but a purchasing power basis.

One such basis is Purchasing Power Parity (PPP) and Wikipedia reports data for 2004 that $3,050 in India has the same purchasing power (of a basket of westernized goods and services -- excluding accomodation) as $39,496 in the US.

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29_per_capita

I have seen article written by Indians who, by their standard of living referred to in their comments suggests that they make maybe $6,000 a year and are bemoaning the delay in their "Green Card" because they are anxious to get to the States and start earning salaries around $50,000. They obviously have no clue that the $6,000 at home needs about $80,000 US to have the same lifestyle. The salaries in both countries are in very close agreement if PPP is taken into account.

It suggests that the work-at-home US programmer earning $80k should move his home to India (or Thailand, or Vietnan) and live like a maharaja.

Posted by: Pierce P Cassidy at March 23, 2007 07:46 PM

An example of purchasing power in India; when I was there in the fall of 2005, you could get a beer in the lobby bar or the restaurant in a five star hotel downtown Delhi for $2.40 (and get a full litre). In a package store you could get a fifth (26 oz, 750ml) of 12 year old single malt scotch for $4.00 in Pondicherry.

Accomodation at a four star beach resort near Malabalipurham with two buffet meals (B,D) was $55 per day.

Posted by: Pierce P Cassidy at March 23, 2007 09:19 PM

Rising wages are really a concern that should be addressed immediately; otherwise India will lose its edge to other low cost centers.

Posted by: IPTV Guy at March 24, 2007 01:30 AM

At the current rate of increase it will take around 30 years for Indian salaries to become comparable with the US or Europe. But the competition for India will be other low-cost destinations like China or Eastern Europe or even Africa, some day. You will also see firms like Wipro or tcs setting up centers in lower cost areas of the United States - because on an average, and offshore firm has 1/3 of its employees in the client locations.

Posted by: Lilian at March 24, 2007 04:11 AM

It seems that Pierce P Cassidy missed the whole point. Steve Hamm's article is from a company's point of view. For a company, a dollar paid to an employee is a dollar out of the company's pocket, no matter where the employee is and now matter whether the emplyee can buy one beer or two with that one dollar. That's the point.

Posted by: Free Education at March 26, 2007 03:43 PM

A large discrepancy between nominal exchange rates and purchasing power parity(a.k.a. "reality") is inherently unsustainable in the long run. As the Indian economy begins to open to the world economy, either inflation, rupee appreciation or a combination of both will inexorably erode the current approximately 5-to-1 purchasing power parity disparity.

I predict this will happen sooner than a lot of people think.

Posted by: A Parent at March 26, 2007 05:42 PM

Salary gap just by looking at $ figures does not make sense. While Standard of living (Note: not quality of living) is climbing at a rapid pace in India, it is still quite low when you compare with the U.S. Inflation in India is much higher than in the U.S. Have you taken that into account?. As Pierce notes, PPP is a better indicator. Your last statement seems like a simple extrapolation of the current indicator - that it will be a couple of decades.

Posted by: Baskar at March 27, 2007 03:59 AM

The developing countries are still having a substantial gap compared with developed countries by the payment. But actually the cost of living in developing countries is much lower.With a lower payment doesn't mean that the talented from developing countries can not enjoy a quality life. Actually,the lifestyle of different countries are different.

Posted by: Mike at March 27, 2007 08:50 PM

Azim Premji is dumb. Your book is actually even somewhat, but not completely, blasphemous because the Real Bangalore Tiger is dead i.e. Tipu Sultan. Mr. Premji is simply selling oil and watered stocks. Indian companies are good except that still have yet to figure out how to be nice to women. But that happens here also.

If I were you I would write about Aishwarya Rai instead of Wipro. Bollywood is bigger business than Wall Street.

Posted by: Nadia Ahmad at March 28, 2007 07:43 AM

Pierce P,

You are incredibly ignorant about PPP.

$3050 in India does NOT, I repeat, DOES NOT equal $39,500 in the US. Those are just the per capita GDP in PPP terms.

In other words, India's per capit DP is just $700 in direct terms, but is $3050 in PPP terms. This does NOT mean $3050 in India equals $39,500 in the US. In India, 40% of the people don't even have basic literacy.

You have so totally misunderstood PPP that I am stunned.

Posted by: GK at March 28, 2007 01:39 PM

I think your Indian salary numbers may be low. When I was in India in 2001, the name outsources (Wipro, InfoSys) were paying experienced programmers $10,000 - $12,000 per year. I have heard through less direct sources that they are paying around twice that now. Tempering this is that the benefit costs (i.e. - health care, employer payroll taxes) are far less than here.

I believe the name outsourcers are towards the upper end of the pay scale but still hard to explain the massive difference with these survey numbers. Heck I thought experienced call center staff is making the salaries you cite.

Posted by: RK at April 8, 2007 07:30 PM

Exploitation of India as a low-cost centre is an arbitrage. When you exploit an arbitrage it disappears - there is no free lunch because by the time you get there it's gone.

Instead of worrying about growing wages we should firstly applaud India for raising the standard of living for millions of its people through work, and secondly start looking for other such win-win (win for the exploiter, win for the exploited) arbitrage situations around the globe.

Posted by: TY at April 10, 2007 09:44 AM

Oursourcing makes sense, else Microsoft, Oracle, IBM-53000 head count now, EDS, Accenture, Yahoo.... may not outsourced.

I suppose you understand that these companies save money doing this.

And where does this saved moeny goes ?

Posted by: San Z. at April 13, 2007 12:24 PM

I think this article is way off. The salaries in India are currently 1/3rd of the corresponding salaries in the US. The article was obviously written to fool prospective US managers into exploring off-shoring options. Getting work done in India (Bangalore specially) is NO longer cheap enough to warrant off-shoring. Sorry Steve... but nice try. The wages in Bangalore need to go back to atleast what they were in mid-2006 to remain competitive.

Posted by: Prithvi at May 1, 2007 03:38 PM

My two points:

1.Pierce and many other point out low cost of living in India which is half truth. The PPP comparison is valid only in the lower stratum of income where you spend most of your salary for food, rent, public conveyance etc. As you go beyond this basic needs the advantage taper off. When you buy car, television, mobile phone, ipod, laptop, branded clothes, vacation abroad the cost is comparable to US price. Well if you feel you do not need these things in life you are welcome to live like maharaja in India with indian salary.

2. Many of you seems to equate cost advantage of outsourcing with salary only, as if this is the only cost for doing business. But proponent of PPP theory must admit that rent for office space, furnitures, hardwares are also low in India and reduce the overall cost.

Posted by: mb at May 3, 2007 02:32 AM


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