The Most Surprising Shortage: Labor

04/12/2007 12:00 am EST

Focus:

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Nicholas Vardy, editor of The Global Guru, points out that contrary to conventional wisdom, there may be a shortage—not a glut—of skilled labor around the world. So much for outsourcing and offshoring!

Staffing agency Manpower Inc. recently released the results of a survey of nearly 37,000 employers in 27 countries. More than four out of ten employers around the world are having trouble hiring the right kind of staff for the right kind of money. And the problem is getting worse. [That means] cost-cutting strategies, like offshoring and outsourcing work to low-wage countries, are running out of gas far sooner than many expected.

The salaries of information technology (IT) workers from Central Europe to India are rising by double-digit [percentages] every year. And the number of highly qualified workers is surprisingly low. Multinationals have reacted swiftly, moving operations to ever lower-cost centers. Nokia, which already employs nearly 5,000 people in Hungary, recently announced that it is building a new handset factory in Romania.

Labor shortages in China are forcing companies to boost wages as the supply of surplus labor from the countryside tapers off. Salaries in China jumped by an average of 8.4% last year, with some factory salaries surging as much as 40%. One out of seven Chinese workers switched jobs last year and turnover in some low-tech industries is approaching 50%.

Both rising wages and turnover are affecting how companies operate in China. Factories are seeing their margins shrink to 5%half of what they were only a few years ago. General Motors, Honda, Motorola, and Intel all have shifted some manufacturing or research to inland locations, where wages can be half what they are on the coast. Others are looking to lower-cost countries such as Vietnam or Indonesia.

The pressure has as much to do with skills as with sheer numbers. McKinsey & Company estimates that only about 10% of Chinese candidates for high-value-added jobs like finance, accounting, and engineering are qualified to work for a foreign company. More than 75,000 jobs for such managers are expected to be created over the next five years. Yet today, China has fewer than 5,000 managers with those skills.

India produces 400,000 engineering graduates a year (five times as many as the United States) and a stunning 2.5 million university graduates overall. Yet only about a quarter of India’s college graduates are up to snuff. The odds at top Indian companies are even worse.

In-house training programs for new recruits at top Indian IT services firms such as Infosys, Genpact, and Tata Consultancy Services fill some of the gaps. But by 2010, India will have a shortfall of 150,000 IT engineers and 350,000 business-process staff.

Jim Rogers is fond of noting that no one can repeal the law of supply and demand. The global labor shortage proves a corollary: In the long run, there is no free lunch.

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