The stock market has been in a panic mode for the last 2 weeks – the economy seems to be on a positive track, but why not the jobs? How is the economy growing without new jobs?

The truth is – the economy is indeed growing and so are the jobs – but just not here. The US economy is recovering and the corresponding job growth is happening in China and India.

Even at the peak of the recession, when jobs in the US were being lost at the drop of a hat, the job market in India and China was growing, albeit at a slower pace. The chart below traces the GDP growth in the US along with the unemployment rate in the US, India and China. As indicated in the chart, China seems to have held steady on the jobs scene even when unemployment was peaking in the US. India, on the other hand seems to have benefited during the job loss in the US. The current bump in unemployment rate in India is more related to the local economy than the global.

In the last 10 years, about 2.9 million jobs in the US have been replaced by 2.4 million jobs overseas. The only company that has bucked this trend is Microsoft, which has created more jobs in the US than overseas. (read: US Multinationals Increase Hiring Abroad, Firing at Home)

A 12-hour time difference with India and blatant concerns with security in China, have not deterred US businessmen from hiring in these countries. Why?

The answer is shear numbers. The US occupies the number 3 spot in the world with respect to the size of its labor force of about 150 million. China and India occupy the top two spots with a combined labor force of about 1.3 billion. After eliminating the workforce in agriculture, the net available workforce for manufacturing and services across the 2 countries, amounts to approximately 800 million. And that is more than twice the entire population of the United States!

Offshoring is not a new concept – it can be traced at least as far back as the 19th century. The colonization in the 19th century by the British, the French and the Portuguese can be considered a form of offshoring. In this case, the owners of capital went to the natural resources. Now, in the 21st century, the owners of capital are going to the human resources. In the industrial era, access to natural resources was the key to profitability. In the information era, access to skilled human resources, is the key to profitability.

Over the last decade, the costs of transportation and network connectivity across the world have dropped significantly. Now geography is less of an issue, so it is easier to tap into a vast pool of resources in the more populous regions of the world with a sizeable middle class. The middle class supplies the core workforce to an economy. Historically, the US has been replenishing its middle class through immigration of young and skilled resources from across the globe. But in the last decade, an archaic immigration system has failed to respond to the domestic demand for the skilled global manpower.

Usually when businesses flock towards an idea or region in droves, it is because of a combination of both pull and push factors. Pull, because the destination is suddenly becoming attractive and push because the origin is becoming more restrictive against business. This time around, the reduction in costs of transportation and a well laid out and accessible information network highway, have made China and India attractive as labor markets. Bulk of China’s labor comprises high school dropouts, which makes it ideal for semi-skilled manufacturing jobs. India has a vast pool of college graduates, making it ideal for hi-tech, back office and even legal and medical data analysis. The push has been provided by the US Federal government itself when it cut the immigration quota for hi-tech workers in the US from 195,000 to 65,000 from 2004 onwards. What this move effectively did, was cut off the available pool of skilled workers available to US employers.

If you are shopping for a dozen apples, you will look for a store that has at least 2 dozen apples available in stock, so you can pick the best for yourself. The reduction in the H1B quota for skilled workers effectively reduced the choices available domestically, inducing hiring companies towards a wider pool offshore. Along with that, the backlog for permanent residency is 7 to 9 years for hi-tech workers from China and India, who form bulk of the talent coming into the US. Microsoft Chairman Bill Gates appeared at the Senate Hearing Committee in 2007 to highlight the impact the archaic immigration system was having on the US economy. (Watch: Bill Gates’ Senate Testimony) It is an easy fix. But the fix is being bundled with legislation for legalizing illegal immigrants. The impasse with respect to illegal immigration has prevented the fixes to the legal immigration from being passed as well.

So, a mixture of attractive global human resource markets and restrictive policies towards talent domestically, is causing the flow of jobs offshore. Of late, even legal analyst and medical analyst jobs are finding their way offshore. President Obama and his economic advisors maybe contemplating pumping more money into the economy, but it will only get diverted offshore.

So what options does the President have to reverse the job trend in the US? More importantly, with the private businesses having tasted the offshore honey, can a sweeter deal be carved out domestically, to induce businesses back to the US? Check out part II of this blog in a week’s time.