India, China losing wage cost advantage - study

NEW YORK (Reuters) - India and China are losing their competitive advantage on wages, and employers will increasingly look to even lower-cost countries for their operations, according to a study by the Towers Perrin consultancy.

In India and China, wages are expected to rise at a faster clip in 2008 than in 2007, even as inflation is expected to go up at a slower pace.

"The labor markets in those countries are incredibly tight," said Ravin Jesuthasan, managing principal and practice leader at Towers Perrin in Chicago. "It's reflective of the amount of work being poured into those markets, either from booming domestic economies or work being moved from developed economies to India and China."

Towers Perrin advises large organizations on human resources strategy and provides actuarial and management consulting to financial services.

In China, salaries are expected to rise 9 percent on average next year, while the increase in India is forecast at 15 percent. Both are 1 percentage point above the increases in 2007, and both are running at almost three times the pace of inflation.

By contrast, workers in Latin America are barely keeping up with inflation. In Venezuela, for example, salaries will go up 22 percent in 2008, but inflation will be 22.5 percent.

Salaries in India and China have been rising at a fast clip for several years, Jesuthasan said. "You play that forward a few more years, and that cost disadvantage, particularly given the currency depreciation in the U.S., is significantly nullified.

"You'll start to see a slowdown of work moving to India and China" in areas like manufacturing and call centers, he said.

The Philippines and Thailand are among the potential beneficiaries.