IT future shifts from labor arbitrage to productivity

Developed-world politicians must respond to the demands of voters who don’t understand how the global economy works or what has changed in recent years and who mostly want policies that are fiscally unbalanced. They generally want governments to spend more money on social programs—in the United States, for example, on Social Security and Medicare—without increasing taxes to pay for that additional spending. The usual response by developed-world governments to such dilemmas is to run bigger fiscal deficits and to borrow more money. Yet most developed-world governments have been rapidly exhausting their debt capacity, and some nations, such as Greece, Portugal, and Spain, are already experiencing fiscal crises.

  1. Marriott has been recognized by Fortune magazine as one among the “100 best companies to work for.” But it’s not clear whether Fortune magazine considers the status of the 60% of labor in Marriott’s ecosystem that appears to be off balance sheet.
  2. This model has wide support from the educated elites who benefit from jobs created in high wage islands by industrialization.
  3. Likewise, the company’s costs may decrease since the cost of running the customer service center may be less (like cheaper electricity or internet).
  4. Remote surgery, for example, may become more viable as networks transmit sharp images without any delays and robots respond more precisely to remote manipulation.

Also, think about the benefits of sending some of your jobs to a different state or even country. For example, an overseas call center lets you provide live customer support representatives at odd hours when U.S. employees might not want to work or demand more pay for working second or third shift. This expanded customer service could help you retain existing customers and attract new ones. Upwork is a great way to connect with talented individuals with the specialized skills you need. We use it to hire editors, writers, designers, researchers, and developers, allowing us to connect with people who know what they’re doing while lowering our costs. Though labor arbitrage has long been used in manufacturing, call centers, and tech support, the pandemic caused a massive upheaval in how employers and employees think about where, when, and how they work.

Foreign Outsourcing – Giving a specific business functions to independent contractors abroad. Outsourcing – Entrusting specific business functions to third-party service providers. For example, a technology company in one country may outsource its software testing to a specialised testing firm, either in the same country or another, at a lower cost. Onshoring – Bringing back an offshore business function to the home country.

In 2002, India, for example, exported 35 percent of its final output in apparel, but by 2017, that share had fallen by half, to 17 percent, as Indian consumers stepped up purchases. Previous MGI research highlighted China’s working-age population as one of the key global consumer segments; by 2030, they are projected to account for 12 cents of every $1 of worldwide urban consumption. As it reaches the tipping point of having more millionaires than any other country in the world, China now represents roughly a third of the global market for luxury goods. In 2016, 40 percent more cars were sold in China than in all of Europe, and China also accounts for 40 percent of global textiles and apparel consumption. The word arbitrage, which relates to the French word for “refereeing,” comes into English-language business-labor circles from its application in the financial world. In the financial realm it refers to purchasing commodities, financial securities and gold in one market and selling them in another market in a near-immediate transaction (where profits come from the price differentials between those two markets).

Major Challenges of Labour Arbitrage

When they add cognitive-computing agents, they achieve a further 20 to 30 percent reduction of FTEs. Another challenge is to maintain consistent quality across geographically dispersed teams. A robust quality control mechanism is needed to ensure that uniform standards are met. Strictly moving production work from one place to another where the same skill set is available but at a lower cost.

Labor Arbitrage Strategy

By shifting labor costs to another market, companies may be exposing themselves to potential legal and ethical challenges. For instance, if the wages in the new location are not comparable with those of the home country, this could lead to accusations of exploitation or unfair labor practices. In addition, some countries may have restrictions on the number of foreign workers allowed to be employed at a given time. The map of global demand, once heavily tilted toward advanced economies, is being redrawn—and value chains are reconfiguring as companies decide how to compete in the many major consumer markets that are now dotted worldwide. McKinsey estimates that emerging markets will consume almost two-thirds of the world’s manufactured goods by 2025, with products such as cars, building products, and machinery leading the way. By 2030, developing countries are projected to account for more than half of all global consumption.

This is worrisome as $36,352, by itself, is perhaps not a living wage in most metros of the country even for a single adult, let alone a family, as per MIT’s calculator on living wages. One form involves offshore workers, where companies can employ foreign workers and pay lower wages, payroll taxes, benefits, and/or overtime. Another variation is the use of inexpensive subcontractors in the company’s home country rather than hiring staff employees. Yet labor cost arbitrage meaning another form is utilising work visa programmes to bring in low-wage workers. Rising budget constraints and economic uncertainty have caused many companies to rethink their strategies before hiring new employees. However, rather than placing a freeze on recruitment drives or cutting costs elsewhere, many organizations have found they can take advantage of the unprecedented opportunities that have arisen in the labor market during the last two years.

What is Labor Arbitrage?

In total, advanced economies’ exports to developing countries grew from $1 trillion in 1995 to $4.2 trillion in 2017. In the automotive industry, Japan, Germany, and the United States send 42 percent of their car exports to China and the rest of the developing world. In knowledge-intensive services, 45 percent of all exports from advanced economies go to the developing world. The Asia–Pacific region is already a top strategic priority for many Western brands. These flows are sometimes driven by decisions of multinationals on where to put ownership of these assets based on tax considerations. See Thomas Tørsløv, Ludvig Wier, and Gabriel Zucman, The missing profits of nations, NBER working paper number 24701, June 2018, revised August 2018; and OECD/G20 Base Erosion and Profit Shifting (BEPS) Project, final report, OECD, May 2015.

And, since the price difference is so low, the amount risked is usually low, too. However, arbitrage in the real world usually entails large-volume trades as well as leveraged capital, timing variations, and other factors that increase risk. When contemplating arbitrage opportunities, you must consider transaction costs, because if they’re too high, they will neutralize the gains from those trades. For instance, in the scenario mentioned above, if the trading fee per share exceeded $0.89, it would nullify any profits.

This approach allows companies to maximize their resources and optimize returns on investment – somewhat akin to discovering a treasure trove in a bargain store. These areas of labor arbitrage can help you reduce labor costs while still finding the talent you need to help your company grow. Trying to control budgets can be difficult, but labor arbitrage can be a great way to get a handle on one of the largest portions of your overall spend.

Want to learn more about how you can leverage labor arbitrage with GoProcure? Instead of choosing between paying someone to work a job with tons of downtime or stretching your current employees too thin, consider utilizing contractors on an on-demand basis. Three to four more essays to follow that step by step lay out my case for an export led growth strategy for India that focuses on full employment. This a continuing series of essays to explore and show how a per capital GDP growth 10% plus rate is feasible for India, and that such goal must be the topmost maximand of our national strategy. Fact is because full employment is not even our goal means we don’t make this argument abroad in places like WTO.

The result is that exchange rates haven’t adjusted freely, leading to the shifting of developed-world service jobs offshore (particularly to India) and the migration of manufacturing jobs (particularly to China). The result is an increase in the supply of labor relative to the demand for labor, which means a decrease in costs. The intraregional share of global goods trade has increased by 2.7 percentage points since 2013, partially reflecting the rise of emerging-market consumption. Regionalization is most apparent in global innovations value chains, given their need to closely integrate many suppliers for just-in-time sequencing. This trend could accelerate in other value chains as well, as automation reduces the importance of labor costs and increases the importance of speed to market in company decisions about where to produce goods.

What Is Labor Arbitrage?

The alternative is impoverished labor moves to countries with higher-paying jobs. Firms maintain competitiveness by enhancing their products and reducing costs. One strategy for cost reduction is labour arbitrage by moving some business operations from a country with a high labor costs to a country with low labor costs. Global labor arbitrage is when a company sends jobs to a location where labor and raw materials cost less. They have to pay staff a reasonable wage and cover things like social security taxes. The company may also incur higher manufacturing costs to import materials to build the product.

But it’s also important to understand that emerging-market economies have a structural advantage that is grounded in the operation of the global economy. Saber-rattling Western trade negotiators frequently focus their attention on the “unnaturally” depressed exchange rates of countries such as China, and this is a component of the structural advantage to which I refer. But its roots run far deeper—all the way down to the fundamental issue that labor can’t be freely traded on a single global market, while capital and commodities can.

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