Global labor arbitrage
Encyclopedia
Global labor arbitrage is an economic phenomenon where, as a result of the removal of or disintegration of barriers to international trade, jobs move to nations where labor and the cost of doing business (such as environmental regulations) is inexpensive and/or impoverished labor moves to nations with higher paying jobs. The "global labor arbitrage" phenomenon has been described by economist Stephen S. Roach
.
Two common barriers to international trade are tariffs (politically imposed) and the costs of transporting goods across oceans. With the advent of the Internet, the decrease of the costs of telecommunications, and the possibility of near-instantaneous document transfer, the barriers to the trade of intellectual work product, which is essentially, any kind of work that can be performed on a computer (such as computer programming) or that makes use of a college education, have been greatly reduced.
Often, a prosperous nation (such as the United States) will remove its barriers to international trade, integrating its labor market with those of nations with a lower cost of labor (such as India, China, and Mexico), resulting in a shifting of jobs from the prosperous nation to the developing one. The end result is an increase in the supply of labor relative to the demand for labor, which means a decrease in the price point (wages, standard of living) where supply and demand curves intersect. This means that some of the workers in the lower cost of labor country integrate into the global economy and their wages and standard of living may rise slightly. According to supporters of international trade, highly skilled laborers, especially college-educated white collar workers (such as computer programmers and IT workers), in the prosperous nation develop new products, services, and markets due to the freeing of their time from mundane activities and they create new opportunities for wealth creation. In reality, however, people in wealthy countries do not possess a monopoly on innovation and knowledge-based college-education-requiring jobs can also be performed for lower wages in other countries, so many of those jobs, such as computer programming and information technology, have also been offshored or may be filled by foreigners on work visas (such as the H-1B or L-1).
As with any other form of trade, the alleged benefit to be gained by such a transaction is efficiency which takes the form of lower prices for affected goods and services. Global trade reduces overall costs to businesses, which, assuming a competitive marketplace, will result in lower prices to consumers and a higher standard of living in the formerly impoverished country. For example, the Pearl River Delta area of China has seen an increase in wages and standard of living over the past twenty years. However, consumers in nations that have lost jobs may also suffer a decrease in wages, income, benefits, and working conditions that is greater than any decrease in consumer prices along with other invisible back-end costs such as increased unemployment and under-employment, a greater need for government social welfare services, crime, and other social problems.
Adam Smith
developed the principle of absolute advantage
. The economist Paul Craig Roberts
notes that the comparative advantage
principles developed by David Ricardo
do not hold where the factors of production are internationally mobile.
Limitations to the theory may exist if there are single kind of utility. The very fact that people want food and shelter already indicates that multiple utilities are present in human desire. The moment the model expands from one good to multiple goods, the absolute may turn to a comparative advantage. However, pure labor arbitrage, where one country exploits the cheap labor of another, would be a case of absolute advantage that is not mutually beneficial.
.) Capital moves to nations with cheap labor, lower taxes and or fewer environmental regulations or other costs of doing business for the purpose of producing 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 for the purpose of producing goods or services at lower labor costs for export back to Nation A's market. This can result in layoffs for workers in Nation A. For example, in the United States, the amount of manufacturing jobs has decreased while the importation of manufactured goods from other nations has increased (along with the United States's trade deficit). These trends are now affecting the service sector as well.
It has been alleged that this type of labor importation may be advantageous. According to http://www.nfap.com/researchactivities/studies/immigrant_entreprenuers_professionals_november_2006.pdf, over 25% of all startups in the Bay Area of the US in the last 15 years were by immigrants (most likely former or current H-1Bs). 40% of all publicly traded and venture founded companies in high tech manufacturing were started by immigrants. These account for more than half of all jobs in this sector. According to http://www.nvca.org/pdf/AmericanMade_study.pdf, immigrant founded companies such as Intel, Sun, Google (1 of its 2 founders, the other is American), Yahoo and EBay together employed more than 200,000 people. However, it is very possible that those opportunities might have otherwise been created by and filled by Americans, especially by Americans who have been retraining and reeducating to enter those fields.
Although only peripherally related to the issue of global labor arbitrage but very much related to the issue of the economic prosperity and well being of non-immigrants, mass immigration can result in a population explosion which can negatively affect the well being of native people. Logically, after a nation's population has reached a certain size relative to its amount of useful land, an increasing population results in crowding (higher real estate costs and less open-space per person), a greater strain on the environment (increased environmental degradation), and increasing costs of living (fewer natural resources available per capita). Consequently, when considered in that context, it might be possible to also regard immigration as a form of "environmental arbitrage" where people flow from areas of high population density to areas of lower population density.
Stephen S. Roach
Stephen S. Roach is a senior executive with Morgan Stanley, the New York-based investment bank. In addition to his position at Morgan Stanley, Roach is a lecturer at Yale University's School of Management and Jackson Institute for Global Affairs.-Career:...
.
Two common barriers to international trade are tariffs (politically imposed) and the costs of transporting goods across oceans. With the advent of the Internet, the decrease of the costs of telecommunications, and the possibility of near-instantaneous document transfer, the barriers to the trade of intellectual work product, which is essentially, any kind of work that can be performed on a computer (such as computer programming) or that makes use of a college education, have been greatly reduced.
Often, a prosperous nation (such as the United States) will remove its barriers to international trade, integrating its labor market with those of nations with a lower cost of labor (such as India, China, and Mexico), resulting in a shifting of jobs from the prosperous nation to the developing one. The end result is an increase in the supply of labor relative to the demand for labor, which means a decrease in the price point (wages, standard of living) where supply and demand curves intersect. This means that some of the workers in the lower cost of labor country integrate into the global economy and their wages and standard of living may rise slightly. According to supporters of international trade, highly skilled laborers, especially college-educated white collar workers (such as computer programmers and IT workers), in the prosperous nation develop new products, services, and markets due to the freeing of their time from mundane activities and they create new opportunities for wealth creation. In reality, however, people in wealthy countries do not possess a monopoly on innovation and knowledge-based college-education-requiring jobs can also be performed for lower wages in other countries, so many of those jobs, such as computer programming and information technology, have also been offshored or may be filled by foreigners on work visas (such as the H-1B or L-1).
As with any other form of trade, the alleged benefit to be gained by such a transaction is efficiency which takes the form of lower prices for affected goods and services. Global trade reduces overall costs to businesses, which, assuming a competitive marketplace, will result in lower prices to consumers and a higher standard of living in the formerly impoverished country. For example, the Pearl River Delta area of China has seen an increase in wages and standard of living over the past twenty years. However, consumers in nations that have lost jobs may also suffer a decrease in wages, income, benefits, and working conditions that is greater than any decrease in consumer prices along with other invisible back-end costs such as increased unemployment and under-employment, a greater need for government social welfare services, crime, and other social problems.
Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
developed the principle of absolute advantage
Absolute advantage
In economics, principle of absolute advantage refers to the ability of a party to produce more of a good or service than competitors, using the same amount of resources...
. The economist Paul Craig Roberts
Paul Craig Roberts
Paul Craig Roberts is an American economist and a columnist for Creators Syndicate. He served as an Assistant Secretary of the Treasury in the Reagan Administration earning fame as a co-founder of Reaganomics. He is a former editor and columnist for the Wall Street Journal, Business Week, and...
notes that the comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...
principles developed by David Ricardo
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
do not hold where the factors of production are internationally mobile.
Limitations to the theory may exist if there are single kind of utility. The very fact that people want food and shelter already indicates that multiple utilities are present in human desire. The moment the model expands from one good to multiple goods, the absolute may turn to a comparative advantage. However, pure labor arbitrage, where one country exploits the cheap labor of another, would be a case of absolute advantage that is not mutually beneficial.
Forms of global labor arbitrage
Global labor arbitrage can take many forms, including but not limited to:Foreign outsourcing
(Sometimes known as Offshore outsourcingOffshore outsourcing
Offshore outsourcing is the practice of hiring an external organization to perform some business functions in a country other than the one where the products or services are actually developed or manufactured. It can be contrasted with offshoring, in which the functions are performed in a foreign...
.) Capital moves to nations with cheap labor, lower taxes and or fewer environmental regulations or other costs of doing business for the purpose of producing 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 for the purpose of producing goods or services at lower labor costs for export back to Nation A's market. This can result in layoffs for workers in Nation A. For example, in the United States, the amount of manufacturing jobs has decreased while the importation of manufactured goods from other nations has increased (along with the United States's trade deficit). These trends are now affecting the service sector as well.
Importation of foreign labor using work visas
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. In the United States, two of the most common foreign work visas are the H-1B and L-1 visas, of which the former is specifically intended for workers with intent to permanently immigrate to the United States.It has been alleged that this type of labor importation may be advantageous. According to http://www.nfap.com/researchactivities/studies/immigrant_entreprenuers_professionals_november_2006.pdf, over 25% of all startups in the Bay Area of the US in the last 15 years were by immigrants (most likely former or current H-1Bs). 40% of all publicly traded and venture founded companies in high tech manufacturing were started by immigrants. These account for more than half of all jobs in this sector. According to http://www.nvca.org/pdf/AmericanMade_study.pdf, immigrant founded companies such as Intel, Sun, Google (1 of its 2 founders, the other is American), Yahoo and EBay together employed more than 200,000 people. However, it is very possible that those opportunities might have otherwise been created by and filled by Americans, especially by Americans who have been retraining and reeducating to enter those fields.
Immigration
Impoverished labor moves towards capital in prosperous nations. This tends to increase the supply of labor relative to capital in the prosperous nations and potentially decreases wages, according to the laws of supply and demand (of and for labor). However, this decrease can be offset by job creation due to talented immigrants, as discussed in the last section. While this is an appealing notion, given that the overwhelming majority of immigrants to the United States, both legal and illegal, are not the very small percentage of the world's population who are innovators but rather blue collar laborers and average college graduates, that possibility may be very unlikely in the United States as a result of economic laws of supply and demand of and for labor.Although only peripherally related to the issue of global labor arbitrage but very much related to the issue of the economic prosperity and well being of non-immigrants, mass immigration can result in a population explosion which can negatively affect the well being of native people. Logically, after a nation's population has reached a certain size relative to its amount of useful land, an increasing population results in crowding (higher real estate costs and less open-space per person), a greater strain on the environment (increased environmental degradation), and increasing costs of living (fewer natural resources available per capita). Consequently, when considered in that context, it might be possible to also regard immigration as a form of "environmental arbitrage" where people flow from areas of high population density to areas of lower population density.
Maintenance of a trade deficit by selling land and capital assets
Foreign labor produces goods and/or services for import into another nation's market without people in other nations purchasing an equal value of goods and/or services from that nation. This could result in the devaluation of the importer's currency and the restoration of a balance of trade, or it could result in the sale of the nation's land and capital assets to people in other countries, which means that the nation with the trade deficit could essentially be exchanging its land and capital assets for ephemeral goods and services, resulting in the nation's impoverishment. The trade deficit can be the result of the other three forms of outsourcing or merely the purchase of goods and services produced by foreign-owned businesses.External links
- Second Thoughts on Free Trade by Senator Charles Schumer and Paul Craig Roberts
- Immigration Gumballs a must-watch, thought-provoking presentation
- Debunking the Myth of a Desperate Software Labor Shortage
- No Jobs for the New Economy or the Old
- Subprime Nation by Patrick J. Buchanan makes mention of how trade deficit dollars are being used to purchase American-owned assets.
- Third World America Forums This is a newly opened and perhaps the first discussion forum dedicated to the issue of Global Labor Arbitrage.