Estimates suggest that intangible capital, which is mainly skilled employees, constitutes 70 per cent of the total capital of large American companies. Attracting and retaining skilled workers is the number one priority of these companies. The fundamental cause of the great emphasis being placed on talent is that production in modern economies is much more knowledge-intensive than production was in the past. This is because modern technologies and capital require abundant supplies of skilled workers to be effective. The competition for talent has raised earnings of skilled workers relative to other workers, and has led to an international search for the best and brightest.
When outsourcing of jobs to India (and other countries) began in earnest in the early 1990s, many software engineers and other highly skilled workers in India were available at wages much below those in the United States and Western Europe. Since the number of skilled workers in countries doing the outsourcing is large relative to the supply of underutilized workers in India, before long outsourcing absorbed all the available skilled workers in countries like India. As long as salaries of Indian workers benefiting from outsourcing were still far below those in America, the competition for these workers by American and Indian companies would be intense. This competition would push up the earnings of skilled Indian workers. Companies report that what they have to pay such skilled workers is rising rapidly: 10-15 per cent per year, and perhaps at much higher rates. The easier it is to outsource skilled jobs, and the closer is the substitution between work done in India and the United States, the larger would be the induced increase in salaries of skill workers in India from the growth in outsourcing. If Indian and American highly skilled employees were considered close substitutes by American companies, competition to employ the cheapest workers of a given quality would induce the salaries of such Indian workers to rise near parity with that of American workers of the same skills.
Of course, Indian and American workers are far from close substitutes because transportation and capital costs are cheaper to companies producing and selling in the American market. Hence outsourcing becomes uneconomic considerably before Indian and American salaries become equal. A front-page article in the Wall Street Journal several days ago indicated that a few high tech companies in Silicon Valley were closing their operations in India, and shifting them back to the United States. These companies lament that salaries of Indian technical employees are rising so rapidly that it has wiped out the advantage of staying in India.
Although outsourcing has certainly accelerated as well as reflected the international hunt for talent, outsourcing is not the only factor that has invigorated the talent market. Migration of skilled workers also is part of the competition across nations for talent. It has long been recognized that educated and skilled persons within a country move more easily than other workers to cities and regions that offer better paying and more attractive work and living conditions. This explains, for example, why earnings of college-educated persons in different parts of the United States are quite similar, much more so than the earnings of persons who did not go to college.
Movement of educated and skilled persons to places with better paying jobs operates across nations as well. Of course, international movement of people is blunted by the many restrictions imposed on immigration by richer nations. However, in their hunt for talent, countries have been making it easier for doctors, professors, and others with high tech and other skills to move legally across nations (although it may be easier for the less skilled to migrate illegally since they can work underground more readily). An increasing number of countries, such as Canada, Australia, and to a lesser extent the United States, have adopted point system for immigrants and passed various laws that offer skilled individuals work permits and permanent residency.
The international movement of talented workers has also greatly increased with the globalization of many companies. Global companies employ workers in different countries from very different backgrounds, and they have little hesitation to choose a president from say Scotland, a vice-president from France, or a head of the research department from India or China. Companies actively recruit skilled workers through H-1B and other programs designed to attract skilled workers, and they lobby for more generous programs that favor the immigration of skilled workers.
The supply of educated persons willing to move across countries has also increased considerably. Television and the Internet have homogenized cultures to a much greater extent than in the past. The decline in the cost of international air travel makes it much easier to return regularly to one's country of birth to visit family and old friends. Moreover, as the number of skilled immigrants from a country grows, other skilled immigrants from that country become more willing to emigrate since the new immigrants can expect to find friends and neighbors with similar backgrounds.
Technology and physical capital are complementary with skilled workers in the production process for most modern goods and services. Therefore, the growth during the past several decades in the international movement of capital and technologies through direct foreign investment in less developed countries has also contributed to the intense competition across countries for highly skilled workers.