Definition

labor arbitrage

Labor arbitrage is the practice of searching for and then using the lowest-cost workforce to produce products or goods. The use of the term labor arbitrage is limited in its daily use; it is more likely to be used in academic papers and business-consulting reports than in everyday business discussions, although the practice itself is common and widespread.

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).

The term as it applies to labor specifically has become more common in staffing and workforce discussions during the past few decades, and the practice has become more prevalent due to shifting government policies and societal expectations as well as new technologies that have allowed the practice to be more broadly applied.

Some experts limit the definition of labor arbitrage, saying it applies strictly to taking work from one location to another where there is the same skill set but at lower costs.

However, some experts use a broader definition and say labor arbitrage encompasses multiple corporate policies that result in lowest-cost labor. That lowest-cost labor can come in a variety of forms today. One form is off-shore workers, where companies can hire workers in a foreign country and pay less for wages, payroll taxes, benefits and/or overtime. Another form is using cheaper subcontractors in a company's home country instead of staff employees. Still another form is using work-visa programs to import foreign workers willing to take lower salaries. Companies that pressure existing workers to take lower wages to save their jobs are engaging in labor arbitrage, too. Some experts also consider the use of undocumented immigrants who generally work for less and aren't able to fight for their legal work rights as a form of labor arbitrage.

Companies throughout history have sought to keep labor costs in check, so in some regard the concept of labor arbitrage is not new. However, historically companies were located near their workforce and stayed in those regions over the long term. For example, in the United States, the textile industry was a New England industry through the early 20th century but then moved all its operations to Southern states in part to capitalize on lower labor costs.

Moreover, companies today can more easily opt to engage in labor arbitrage for pieces of their production, engaging different sets of workers for different components of their products or services.

A number of factors have caused this shift in how companies now engage in labor arbitrage, a shift that started following World War II and has continued into this century. Lower national tariffs helped foster global workforce competition. At the same time new technologies broke down barriers that made shifting work away from central corporate facilities easier and more efficient. The Internet and global communications technologies, for example, enable more off-shoring and outsourcing while still allowing corporate controls to be in place.

This was last updated in February 2016

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