The coming collapse of IT jobs and wages

March 27, 2009 1:40 PM EDT

When a homeowner cuts the price of a house dramatically, real estate analysts have a word for it:  capitulation, a surrendering to market forces. Something similar is arriving for IT workers.

A bellwether is IBM. Its workforce in the U.S. declined 5% last year to 115,000, but its workforce in Brazil, China, Russia and India grew 15% to 113,000. The vast majority of these workers are in India.

IBM isn’t providing any details regarding its recent round of layoffs, which may be between 4,000 to 5,000 employees in its Global Business Services unit – one of its most profitable. But IBM’s offshore strategy is clear enough.

In 2006, IBM produced a chart illustrating the stark differences in wages between India and the U.S. and presented it to analysts in Bangalore. 

Ron Hira, an assistant professor of public policy at the Rochester Institute of Technology and author of Outsourcing America, says this chart represents a departure point for IBM.

“I think this moment was so important because it was when Big Blue made the fateful decision to compete by substituting low cost workers in India and elsewhere for high-cost American workers,” said Hira. “Instead of choosing to compete by investing in better tools, technologies, and training for their American workforce, they chose to compete their American workers head to head with workers in other countries who can afford to be paid less. And they gave those workers in low-cost countries the same, or better, tools, technologies and training, as their American workforce,” he said.

Even though IBM is cutting jobs, it is creating jobs in the U.S. as well. But some of this expansion is in relatively low wage areas, such as Dubuque, Iowa (pop. 60,000). The average salary at this 1,300 employee services center will be in the mid-$40,000.

Wage cuts are also affecting IT workers. Hewlett-Packard recently announced salary reductions, and it’s likely that other companies have done so as well. Will workers make up that lost ground?

Has the moment of capitulation arrived for the tech labor market? Look long and hard at this chart and ask, instead, how it will be avoided.