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Understanding Global Labor Arbitrage: Definition, Pros & Cons

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.

As huge numbers of the global workforce were forced to set up offices from home, the rise of remote working practices during the COVID-19 pandemic signaled a permanent switch to remote, hybrid, and other flexible working models. With such ‘new normal’ working arrangements, employers now have greater opportunities to hire employees in parts of the world where the cost of living is lower enabling them to benefit from lower labor costs as well as new pools of talent.

Remote work is just one of the ways businesses are able to benefit from global labor arbitrage practices. This article will discuss global labor arbitrage further and see how it can benefit your company.

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What is global labor arbitrage?

Global labor arbitrage is an economic practice where companies seek to take advantage of lower labor costs by hiring workers or sourcing production to countries with lower wages than their own. Traditionally, this meant substituting labor from a more prosperous country for one where goods or services could be produced at a lower cost. With the arrival of the internet, video conferencing, and project management software the barriers to trade that previously existed have been reduced significantly making it easier for companies to communicate and collaborate with employees in foreign locations instantaneously. Global labor arbitrage comes in many forms which include foreign outsourcing, immigration, and the importation of foreign labor through work visas. While global labor arbitrage enables companies to lower their labor costs and gain access to highly skilled workers in other parts of the world, it has also been criticized for creating an unequal development between central and peripheral countries and for contributing to job losses and lower wages in the company’s home country as work is outsourced elsewhere for less. With cultural and communication barriers as well as the potential for negative perception, it is important to carefully consider your organization’s goals and objectives to ensure they align with global labor arbitrage practices.

How can your company benefit from global labor arbitrage?

Below are some of the ways your company can benefit from global labor arbitrage:

  • Lower labor costs
  • By paying employees in countries where the cost of labor is less than in your own country you can lower your company’s labor costs and increase your profits. This is especially advantageous for industries that have high labor costs such as the manufacturing and call center industries.
    The introduction of remote working roles can also offer your company savings due to lower salary expectations in other parts of the world as well as savings on office rents, utilities, and maintenance.
  • Access to a wider labor market
  • By searching for talent further afield, your company has access to a wider pool of skilled candidates than before. This can benefit businesses that struggle to find experienced workers in their own country due to a skills shortage.
  • Advances in technology
  • This includes recent shifts in the way we work have opened up the possibility for employers to hire employees remotely in other markets, significantly widening the pool of prospective candidates.
  • Greater efficiency
  • By outsourcing tasks to foreign countries where labor costs are cheaper and specialization is greater, your company can take advantage of operational efficiencies allowing it to direct its efforts to other areas such as sales and marketing or product development. Outsourcing work in this way also has the potential to increase your company’s efficiency and profitability as cost savings can be realized through reduced overheads and lower taxes.
  • Global Business Expansion
  • Sourcing production or staff from other countries can also facilitate your company’s global business expansion through the creation of global supply chains. As production activities, manufacturing and distribution are outsourced to other countries where the labor costs are lower, your company can benefit from building a network of suppliers and subcontractors in different parts of the world, helping it to increase its competitiveness and expansion in the global marketplace.
  • Competitive advantage
  • By outsourcing non-core activities such as data processing or accounting and payroll, your company has greater ability to focus on its core competencies and areas of expertise. This also allows it to allocate its resources to launch new products and services, helping to accelerate its time-to-market, and further improving its competitive advantage.
  • Diversity in the workplace
  • Global labor arbitrage can result in greater diversity, equity, and inclusion within your workplace. Hiring employees from foreign countries can bring diversity in terms of geographic location, culture, and economic background and can help introduce new insights and ideas into your company. A diverse workforce can inspire your organization to become more innovative by bringing new perspectives which might not be gained by remaining insular.

How can a global employer of record enable labor arbitrage?

A global employer of record (EOR) can enable labor arbitrage by assisting businesses to take advantage of lower labor costs in other countries without the need for them to set up their own legal entities or handle local employment laws and compliance obligations. An EOR will be responsible for hiring workers on behalf of a company as well as ensuring all payroll, tax, and legal matters are complied with. Outsourcing these responsibilities to a global EOR allows companies to direct their focus toward their core business activities whilst taking advantage of the lower labor costs in other countries. Whether you are looking to increase your overseas expansion or simply assemble a global team, Horizons can help your company with hiring employees globally and in accordance with local laws. As a Global PEO, we take care of all recruitment, payroll, and tax compliance matters for your global workforce helping you to enter a new foreign market quickly and without the costs of setting up an office in your chosen country. Contact us today to see how we can support your company in hiring top talent abroad.  

Frequently asked questions

It is an arbitrage as the purchaser of the labor is benefiting from the differential in wages/salaries in different countries.

Not necessarily. For example, hiring contractors rather than employees can sometimes be an effective labor arbitrage when hiring domestically.