Monday, July 02, 2007

What's the Inflation Rate in India?

by Ken Houghton

The glorious Naked Capitalism makes an economist's heart flutter with talk of convergence:, a search engine company that uses image recognition software to find pictures on the web, took the step of closing in India after seeing the wages of top-level engineers in some cases rise close to US levels....

In the next few months, would have had to lift the salary of one of its Bangalore engineers to 75 per cent of the US level, even though the same engineer earned only 20 per cent as much as an equivalent US-based worker two years ago, Mr Shah said.

The plural of anecdote is certainly not data, but this datum implies (rounding down) that wages in Bangalore have been rising at a rate of about 65% per year faster than US wages. (From 20% of x to 75% of x' over, rounding up, about 2.5 years.)

Since no one is talking about India's hyperinflationary economy, the apparent conclusion is some combination of (1) Bangalore is a relatively insignificant part of the Indian economy, (2) the rising tide there not only isn't lifting boats, it's increasing income inequality, or (3)the requirements of are so different from all the other companies hiring workers that only a very select few Bangaloreans are capable of working for the company, even though it has no trouble hiring U.S. workers.

Maybe the earth really isn't as flat as Tom Friedman claims. Or maybe we need India to stop being a representative democracy.*

UPDATE: Just to be clear, FX rates don't explain anything near the magnitude of the change, as Yahoo! makes clear:

*The link between this last sentence and the first two possibilities is left as an exercise to the reader.

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