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Economists call this labor arbitrage. More recently, offshoring incentives also include access to qualified personnel abroad, in particular in technical professions, and decreasing the time to market. [2] Jobs are added in the destination country providing the goods or services and are subtracted from the higher-cost labor country. [5]
Most scholars have argued that offshoring is primarily driven by opportunities to reduce labor costs and by labor arbitrage effects. [5] While the ORN surveys confirm the importance of costs, they also reveal that companies use offshoring as a means to access talent pools outside their home countries, in particular for higher-skilled work.
Global labor arbitrage can provide major financial savings from lower international labor rates, which could be a major motivation for offshoring. Cost savings from economies of scale and specialization can also motivate outsourcing, even if not offshoring. Since about 2015 indirect revenue benefits have increasingly become additional motivators.
In the 1970s and 1980s, the influx of Japanese automakers prompted further investment in Mexico, as U.S. automakers sought to offshore labor and cost-intensive production.
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) are inexpensive and/or impoverished labor moves to nations with higher paying jobs.
While the US remains home to some of the world’s largest drug companies, much of the industry’s manufacturing has moved offshore, partly in order to take advantage of lower labor costs.
Offshoring can have its own challenges like communication and cultural issues, high turnover rate, lack of effective management, physical proximity, etc. It is crucial for companies to either invest in a robust management structure in offshore or find a trusted partner to effectively leverage offshore teams.
The labour supply curve shows how changes in real wage rates might affect the number of hours worked by employees.. In economics, a backward-bending supply curve of labour, or backward-bending labour supply curve, is a graphical device showing a situation in which as real (inflation-corrected) wages increase beyond a certain level, people will substitute time previously devoted for paid work ...