What is Labor Arbitrage? Definition from SearchCIO

They also have significant opportunities to serve the changing needs of aging populations in the developed world.2 2. See David Court, “Serving aging baby boomers,” mckinseyquarterly.com, November 2007. The underlying global economic processes under way are very powerful, and the profit opportunities will be enormous as four billion people in emerging markets triple or quadruple their incomes and wealth over the next 20 years. Labor arbitrage is the process of shifting labor costs from one market to another in order to optimize cost efficiency. This practice has long been used by businesses in a variety of industries, as it can be an effective way to maximize efficiency and profits. By taking advantage of lower wages and improved working conditions in certain markets, companies can gain substantial savings on labor costs without compromising quality.

1. The change is the prices of the trade-able price of the economy alone and we can fully compensate for that, and still come out with a surplus.
2. The price of the stock on the foreign exchange is therefore undervalued compared to the price on the local exchange.
3. Labour arbitrage often relies on the availability of skilled labour in various regions.
4. It is also possible that these technologies could lead to nearshoring and regionalization of trade instead of reshoring in advanced economies.
5. Labour arbitrage allows businesses to tap into talent pools in different parts of the world that are not readily available in the home country.
6. The term as it applies to labor specifically has become more common in staffing and workforce discussions during the past few decades.

Many investors like this type of trading because it provides liquidity and encourages market efficiency by identifying price discrepancies and fostering price convergence. Price discrepancies across markets are generally minute in size, so arbitrage strategies are practical only for investors with substantial assets to invest in a single trade. The advent of ultra-fast 5G wireless networks opens new possibilities for delivering services. Remote surgery, for example, may become more viable as networks transmit sharp images without any delays and robots respond more precisely to remote manipulation.

What is Labor Arbitrage?

Yet the public debate about trade is often about recapturing the past rather than looking toward the future. The mix of countries, companies, and workers that stand to gain in the next era is changing. Understanding how the landscape is shifting will help policy makers and business leaders prepare for globalization’s next chapter and the opportunities and challenges it will present. With many companies facing budget constraints, hiring employees might not look feasible right now. However, finance and procurement leaders don’t necessarily have to implement a hiring freeze or cut back as much on other spending if you can leverage labor arbitrage.

Any company sourcing its production or service operations in a lower-wage emerging-market country therefore can save enormously on labor costs. That’s painful for displaced Western workers, but it’s good for the company’s profits, good for consumers in developed markets, and good for the newly minted citizens of the global economy who are working in emerging-market factories and call centers. This is a dynamic we take so much for granted that it’s easy to imagine it as a semipermanent condition that will underpin global economic development for the foreseeable future.

This can result in certain people from the original place of business losing their jobs. When people emigrate from nations with poor wages to nations with more prosperous ones, this can cause the wages or jobs in certain industries to be cut. Capital moves to nations with cheap labor, lower taxes and or fewer environmental regulations or other costs of doing business to produce goods and services for export to other markets. The classic example is the case of a factory or office closing in Nation A and then moving to Nation B to produce goods or services at lower labor costs for export back to Nation A’s market.

Note there is lots of confused thinking here on devaluation, import costs going up as a consequence, with we being a net importer and so on and so forth. At the top of rent creating mechanisms, and the most powerful and least visible one, is the over-valued INR. The number one problem in our Nation of 1.4 billion is to convert the labor of unemployed people into income for them from productive enterprises. Note here that all incentives & subsidies to corporates have always been linked to Capital invested in a firm making gold platting of investments, and asset gathering, a very lucrative business by itself. This model has wide support from the educated elites who benefit from jobs created in high wage islands by industrialization. So a happy consensus between politicians, tycoons and the urban elites backs this model of modernization since independence.

How to do Labor Arbitrage Right

In the 2008 financial crisis, securitized assets were supposedly sold off to outside investors and hence off the bank’s balance sheets. Although not legally required, banks had to pick up losses from these supposedly off-balance sheet assets because they wanted to be able to go back to the capital market to raise funds in the future. By using labour arbitrage, firms can operate around the clock by leveraging time zone differences, leading to increased productivity and faster turnaround times.

The key to our prosperity is first and foremost monetization our surplus labour in the global market. For example, in companies that apply automated testing, self-provisioning and agile methodologies into existing shared services organizations, we’re seeing 30 percent or more productivity gains. The good news is it’s very clear that some of the ingredients that allow organizations to change productivity have the potential for a cost impact that is similar to or greater than offshoring. As attention increasingly turns to these productivity aids, organizations find that the tools provide dramatic improvements in productivity across pretty much every aspect of IT and business processes. Expanding into new markets often involves setting up local operations or utilising labour in those markets. Labour arbitrage supports market entry by providing access to local knowledge and expertise.

Where—And How―To Find Remote Jobs

Offshoring – Relocating a business function abroad to a low-cost foreign country. Labor, often skilled and educated, moves to a nation on a temporary or permanent basis. This has the effect of increasing the supply of labor in that nation’s market. It is an arbitrage as the purchaser of the labor is benefiting from the differential in wages/salaries in different countries. Navigating the labor arbitrage world can seem like playing 3D chess, especially for large companies.

Spinners are a law unto themselves because being very capital intensive, they want to lock in cotton at the cheapest possible price. The answer to this conundrum is not shunning capital intensive industry, – we need it as much as others do – but to prevent it from using its monopolistic power to extract rents from the rest of the players in any given industry. How many workers actually service the entire ecosystem of 1.4 million rooms? In its 2020 sustainability report, Marriott states that 745,000 workers at its managed and franchised properties wore the Marriott badge globally. This calculation seems to pass the smell-test as the cost of each room works out to roughly $83,000 ($1.3 billion/15,692 rooms).

This makes the business more flexible and adaptable to changing market conditions. Labour arbitrage allows businesses to tap into talent pools in different parts of the world that are not readily available in the home country. This can be especially valuable when specialised skills like software development and graphic design are required.

GoProcure is a procurement solutions company providing a B2B e-commerce platform that brings together an ecosystem of suppliers, retailers, wholesalers, financial institutions and shippers to provide a frictionless buying experience to any enterprise. There is much confusion in Reserve Bank’s model for calculating relative productivity gains between two time periods, usually 2 decades apart, that I shall explore in a later article. However, there is also much concern about “currency manipulation” that the US is supposed to fling at trading partners when they let their currency depreciate against the Dollar.

In addition, we have the looming prospect of increasing barriers to offshoring ranging from a potential border tax on services, immigration reform and reform of H-1B visas — all of which lead to higher costs. The IoT can make delivery services more efficient by tracking shipments in real time, and AI can route trucks based on current road conditions. At ports, autonomous vehicles can unload, stack, and reload containers faster and with fewer errors. We calculate that new logistics technologies could reduce shipping and customs processing times by 16 to 28 percent. See Simeon Djankov, Caroline Freund, and Cong S. Pham, “Trading on time,” The Review of Economics and Statistics, 2010, Volume 92, Number 1.

The biggest players, the composite mills are clue less about exports and know a little only about highly commoditized products like denim, or towels, or bedsheets. Suppose we had only one producer in garments, who grew cotton, spun yarn from it, wove it into cloth, and then stitched garments, say shirts, and sold them in the global market. Monetizing our labor can lead us to the goal of labor cost arbitrage meaning 10% plus GDP growth that we need to catch up with the world. Over the decades, we have come to believe that we are an over-populated, under resourced country, with little Capital, and therefore, it is impossible to find the wherewithal to create meaningful jobs for all our people. The company went from having over 100 people managing its data centers to five after moving to the cloud.

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The decline in trade intensity reflects growing industrial maturity in emerging economies. Over time, their production capabilities and consumption are gradually converging with those of advanced economies. Declining trade intensity in goods does not mean globalization is over; rather, digital technologies and data flows are becoming the connective tissue of the global economy. Although output and trade continue to increase in absolute terms, trade intensity (that is, the share of output that is traded) is declining within almost every goods-producing value chain. Flows of services and data now play a much bigger role in tying the global economy together. Not only is trade in services growing faster than trade in goods, but services are creating value far beyond what national accounts measure.