Almost two years ago, a large portion of the global workforce switched almost overnight to remote work.
And there’s no going back: according to Owl Labs’ State of Work 2021 Europe report, 92% of European companies are now exploring progressive workplace policies, like four-day workweeks and alternative working arrangements.
While many companies plan to operate on a hybrid model going forward, 11% of those surveyed said that they planned to get rid of their office entirely.
And some big players are getting on board: Twitter CEO Jack Dorsey announced in May 2021 that he was opening the door for employees to work from home ‘forever’.
All of this has created interesting and unprecedented opportunities for both employees and employers.
With so many companies declaring themselves ‘remote-first’ and making certain roles permanently remote, job-seekers have more opportunities before them than ever before.
And companies can also benefit from this change through leveraging labour arbitrage to hire in areas where the cost of living is lower — allowing them to both lower their labour costs and open the door to new talent.
In this article, we’ll discuss the benefits of this new type of labour arbitrage for companies, as well as how leveraging independent contractors can be an effective form of labour arbitrage too.
We’ll also share a warning about going too far with labour arbitrage in the context of the ‘war for talent’.
First, a quick definition:
What is labour arbitrage?
The basic definition of labour arbitrage is the practice of finding and using the lowest-cost workforce to produce products or provide services.
Traditionally, this meant taking labour from one location to another, where the same skillsets can be found at a lower cost.
This has become more prevalent in the past few decades, largely due to shifting government policies, changes to societal expectations and technological advancements that allow companies to hire across borders.
When most people think of labour arbitrage, they picture companies in developed nations like the UK or the US outsourcing certain business operations, such as production or call centres, to less-developed nations where wages are cheaper.
However, broader definitions of the term include various corporate policies that result in lower labour costs.
Importing labour through work-visa programmes
Work-visa programmes also allow countries to import foreign talent where there is a supply issue in the local market.
This usually involves skilled and educated workers moving to a country where there is a high demand for their skill set, increasing the supply of talent in that market and effectively driving down costs.
Using subcontractors at home or abroad
Many companies are now supplementing their full-time workforce with independent support from freelancers.
Because companies can easily engage contractors for short periods and don’t have to pay the various costs associated with hiring employees, this can save them money — making it a useful form of labour arbitrage.
Labour arbitrage also encompasses a number of unethical — and, in some cases, illegal — practices that certain companies deploy in order to lower their labour costs.
This might include hiring undocumented immigrants for very low wages or pressuring current employees to accept a lower salary in order to keep their jobs.
In-country labour arbitrage in the post-COVID world of work
According to OECD data, the number of professionals ‘teleworking’ in France in the period from March-May 2020 had doubled compared to the same period the previous year.
The situation was similar in the UK, with 1.8 times the number of remote workers in 2020 than in 2019.
And, while many employees have now returned to the office, many others haven’t — and will remain remote workers for the foreseeable future.
New technologies bring new opportunities
Advances in communication technology over the past few years have made it easier and easier for companies to work with remote employees.
And of course, this has only been exemplified by the pandemic: these days, we’re all used to hopping on a Zoom call or communicating with colleagues through a Slack channel.
This has given an extra boost to an already-growing trend: companies hiring remote information workers from their own country, but from areas where the cost of living is lower.
3 benefits of labour arbitrage for employers
Companies that are struggling to keep up with their staffing costs can see a number of benefits from engaging in ethical forms of labour arbitrage.
1. Reduced labour cost
The most obvious advantage of labour arbitrage is that it can vastly decrease labour costs — even when companies source talent from different areas of their own countries.
In the UK, for example, the average salary for full-time employees in London was £39.7k in 2021, compared to the national average of £31.2k.
In the North-East, the area where salaries are lowest, the average was £27.5k. According to Indeed data, the average salary for an IT technician in London is £28,525, compared to £22,478 in Manchester.
By introducing permanent roles that can be done remotely and looking outside of their immediate area, there’s a definite opportunity for companies to save on salaries — without new hires feeling they’re being short-changed.
Plus, companies hiring remotely can also save on expenses like office space, utilities and building maintenance.
2. Access to a wider labour market
According to a Bloomberg report, a survey of nearly 45,000 employers across 43 countries found that 69% were experiencing difficulty filling roles in 2021 — the highest rate in 15 years.
In this context, the advances to technology and societal shifts that allow for remote working provide a huge opportunity for employers.
By looking outside of their local areas (and in some cases, abroad) for new talent, companies can access a much wider pool of candidates for open roles.
By leveraging tools such as LinkedIn Talent Insights, recruiters can search for pools of professionals for the roles they need to fill, and potentially find some hidden gems — including in areas where salary expectations are lower.
3.Improvements to diversity, equity and inclusion
Certain forms of labour arbitrage can also result in greater diversity, equity and inclusion.
For example, companies that hire employees from abroad through visa programmes can benefit from a more diverse workforce — and the innovation and insight this can produce.
Even for those hiring remotely within their own countries, diversity in terms of geographic location, economic background and many other factors can bring new perspectives and ideas to a company.
Companies operating out of capital cities are often somewhat insular and could benefit from input from those not living in large metropolitan areas on how their products and services could be better adapted.
Using contractors as a form of labour arbitrage
As of 2021, there were an estimated 22 million self-employed workers in Europe.
This vast talent pool is certainly worth considering if you’re struggling to hire in 2022 — and could help you to save on labour costs too.
While not traditionally thought of as a form of labour arbitrage, turning to contractors is nonetheless a way for companies to reduce costs.
Also, while freelancers’ day rates may sometimes appear high at first glance, employers must take into account the extra costs they need to pay for an employee, including:
- Employer contributions to health insurance, pensions, etc
- Sick pay, holiday pay and other leave
- Office space, furniture and equipment
In addition, freelancers bring a great deal of flexibility: employers can engage them only when they need them, and easily pause or end their contracts — presenting a huge financial advantage over full-time hires.
All of this means that using freelancers for key roles can be a great way for companies to save money on labour costs without engaging in unethical labour arbitrage practices.
Labour arbitrage and the war for talent: a warning for employers
While the changes to the world of work brought about by COVID-19 and the rise in remote working certainly represent some interesting opportunities for employers, it’s important to proceed with caution.
Put simply, it works both ways.
While employers now have access to wider talent pools at a potentially lower cost, those same employees also have unprecedented access to jobs in higher-paying markets, regardless of their physical location.
This doesn’t mean that companies can’t benefit from hiring in areas with lower salary expectations, but it’s important to be realistic about the number of opportunities that each potential new hire may now have to choose from.
With vast differences in cost of living between different areas of the same countries, there’s definitely room to make sure everyone is happy.
If you’re looking to save on labour costs by making remote hires in cheaper areas, make sure you’re still offering a competitive salary.
Alternatively, determining roles you could potentially fill with freelance support is an effective way of reducing labour costs without exploiting workers — or being turned down by candidates who have found more competitive remote offers elsewhere.
While it’s not certain what the future holds for remote work and the possibilities of in-country labour arbitrage, it’s clear that the world of work has changed.
Many companies who were initially reluctant to allow employees to work from home have found that productivity remained the same — or even increased.
This means that many are not looking to bring everyone back to the office any time soon.
And, with many companies, including Nationwide, Upwork, Quora and PwC now claiming to be ‘remote-first’ there’s huge potential to explore previously inaccessible avenues — for employees and employers alike.
If your business is searching for labour arbitrage solutions, CXC is here to help.
With our bespoke solutions your business can gain a competitive labour advantage over your competition.
Contact our team today to begin your labour arbitrage journey.