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Role of demographics & the arbitrage of labour in shaping domestic and…
Role of
demographics
& the
arbitrage of labour
in shaping domestic and regional economies
What is it?
Leverage the cheaper unit labour costs to maximises output for minimal cost
The difference in labour costs is an
incentive
to reevaluate the position's geographic location, whether in the same country or to a global market.
Some labor arbitrage is a natural part of a complex global economy, too much can cause unintended social, political and economic problems.
Previously huge pool of
untapped labour
in certain countries
Asia/China
Labour was largely redundant,
under utilised
and thus
inaccessible
to the global economy
Economically desirable for both corporates and governments to access this labour
Effect of globalisation, typically associated with outsourcing or offshoring
Labor arbitrage usually occurs when it represents a financial advantage for businesses
Drivers - HOW
Reduction of trade barriers
Chinese free trade zones
North American Free Trade Agreement 1994
trade started to flourish
One of the world's largest free trade zones and laying the foundations for strong economic growth and rising prosperity for Canada, the United States, and Mexico.
Financial liberalisation - open economies
Technology
Improved communications = opportunity business overseas
1980s telecommunications improved due to deregulation of the telecommunications industry
Access client data/software/databases
outsource accounts to Mauritius
Development of the internet and email =
access
Near-instantaneous document transfer
Data can be transmitted anywhere within a few seconds
Allow for time zone arbitrage
Politics
Structural political changes
Laissez faire Washington Consensus - boom in innovation/lower costs
Big Bang 1986 Reagan/Thatcher - unleashed financial innovation/liberalisation
Governments
contribute
to labor arbitrage by making their national labor force more appealing, either by reducing payroll taxes for foreign businesses or relaxing workers' rights laws.
Health insurance and paid leave in some countries
Previously, a lot restrictions on international trade, recently world has adopted globalisation and allows free movement of capital and labor
Liberal policies have allowed companies to set up their operations across the globe on purely business terms and without any nationalistic fervour (intense feeling)
India financial liberalisation 1991 -
Drivers - WHY
Cost Incentive
Developed countries inflationary wage pressure
Deterrent for large MNCs
Higher labour costs drove businesses to seek elsewhere for labour
Lax labour laws in developing countries/emerging markets allowed western corporations to exploit labour
Less concerned about the conditions, rights, fair pair, health insurance and paid leave
Increased global competition and low pricing power are driving the more aggressive forms of arbitrage
Forms
Temporary Workers
Labour, often skilled and educated, moves to a nation on a temporary or permanent basis. This has the effect of increasing the supply of labour
Immigrants
Willing to work for less i.e. Polish plumbers in UK
can drive populist views
the labour is coming to them
skillset -
Outsourcing
Countries like India and China have witnessed an economic boom in the past few years
Developed countries in the West have outsourced their productive activities to low cost locations
Contracting work out to a third party
Apple outsourcing production to China and HP outsource to India
Benefits
Cost
Competitive advantage
Reduced labour cost
Outsource to cost effective jurisdictions that specialise in certain activity - global supply chain
Apple outsource different components to different places to keep costs low i.e. Japan, Taiwan, US, China
Employment generation
Economic development
Opt to engage in labor arbitrage for pieces of their production, engaging different sets of workers for different components of their products or services
Lift people out of poverty
2005 - 2015 35 million Brazilians lifted out of poverty
Higher value jobs - increased disposable income - encourage spending - wealth creation
Improve standard of living
Opportunity for
societal benefits
and government revenue from tax take (employment) to spend on infrastructure, education etc
Upskilling - greater opportunity for youth (supported by education i.e. India) - allows for specialisation
Wage inflation is a natural component of a growing and evolving industry, particularly in developing countries - India and Philippines
unions?
Drawbacks
Exploitation
Child labour
Rana Plaza
Race to the bottom
Competitiveness drives down standards
Aim of reducing cost
Development of sweatshops - poor working conditions
Unsound working practices
Hinder domestic economies
Unemployment
Governments stand to lose, or gain, tax revenue as businesses export and import workers
politically viewed as undesirable as it takes away from domestic economy
losing expertise - brain drain - immigration
Global politics
Dependent on national relations
Trump
Free trade agreements
Contagion
Financial Crises - pull back operations
Favourable to large MNC
they have the resources to take advantage - harder for smaller businesses
Future
Diminishing returns
Full cycle - run out of countries to exploit low labour costs
Societal impact of robots/automation of manufacturing
Rapid growth in employment puts pressure on economies therefore eroding the low cost base
Trump
Change in political consensus driven by populist politics
"Make America Great Again" protectionist rhetoric
Bring manufacturing jobs back to US
Use trade agreements as a political and economic tool
Renegotiate the terms of NAFTA - political manifesto
TTP
Ageing population
Cost of doing business has increased due to inflationary pressures in the economy
China
- no longer productive
Other countries more attractive
India and Africa
Deskilling
Rise in technology - using robots - cheaper over the long term
Robotics - manufacturing process
Foxconn - robotics - Apple and Samsung
manufacturing - soon to be solely automated
Localisation
CEO of 3M
benefits of operating in the mighty USA
employ 20,000 people in manufacturing in America and we have expanded this by 10 per cent in the last five years
localisation and regionalisation. We think you should invest in your domestic market as much as you can
Brexit
media driven populist views
immigration levels - polish plumbers - anti immigration drives populist views