3.4.3.2 Moving Work – Outsourcing for Lower Labour Costs

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Some wealth-creation activities move to countries with lower labour costs; everybody is familiar with stories of call-centres and software development being moved to India, and high-volume manufacturing moving to China. It might be thought that the labour market for the lower levels of skill would be a world-wide ‘race to the bottom’ and that workers would be exploited, but wealthier countries can protect themselves from this threat by increasing their national average productivity – which is what underpins wage levels in a country as a whole (3.3.3.1).Productivity can be affected in several ways:

· Training (3.2.5) can enable employees to be more productive.

· New technologies, better facilities and better infrastructure can enable industries to be more efficient (3.2.8).

· The regulatory burden (3.3.1) can also affect the productivity of industries.

A country like America, for example, has high overall productivity, which enables it to pay higher wages than less developed countries. If new suppliers start out by competing purely on the basis of low wages, existing suppliers can continue to retain some market share by achieving higher quality or higher productivity. As the new suppliers then have to improve their quality to compete, they find that their labour costs start to increase for a number of reasons:

· Additional processes are required to achieve high quality.

· Workers start to demand higher wages, as their share of companies' success.

· The workers become more skilled, which increases their bargaining power because they become useful to other employers.

It takes time for countries to develop their own technical expertise and to start to pay higher wages. Japan is an example which is often quoted, having imitated other countries' products and processes after the Second World War before attaining technical leadership in several high-technology sectors. From having been a low-wage economy itself, Japan now outsources work to other countries with lower labour costs.[1]

Countries tend to follow each other through a similar growth profile: as less developed countries become more productive, their wages too will start to increase; that growth in prosperity increases consumer demand and creates new job opportunities – but some businesses will move away to seek lower labour costs elsewhere. This continual movement of work results in short-term social problems in areas which have lost jobs and therefore have to find new ones.