Labour arbitrage
Topic: Employment, Unemployment and Informalisation · NCERT: Beyond NCERT
Meaning
Labour arbitrage means moving work to places where labour is cheaper, in order to cut costs. It is usually done through offshoring, which means sending work to another country. The firm earns the difference between high wages at home and low wages abroad. The gain lasts only while the wage gap lasts.
Example
India's IT-BPM sector (IT services and business process management) grew because Western firms sent software, call-centre and back-office work to India, where skilled workers cost less. This work is now exposed to reshoring, where work moves back to rich countries, and to AI, which can do some of these tasks itself.
Don't confuse with
- Outsourcing: this means handing work to another firm, which may be in the same country or even in homes. Labour arbitrage is specifically about the saving from cheaper labour elsewhere.
Related concepts
- Voluntary unemployment
- Involuntary unemployment
- Frictional unemployment
- Structural unemployment
- Cyclical unemployment
- Technological unemployment
- Natural rate of unemployment
- Hysteresis
- Okun's law
- Efficiency wage