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Offshoring will flatten wages in the United States and other advanced economies.
GLOBAL LABOR ARBITRAGE - THE PRACTICE OF CONSTANTLY REPLACING expensive labor in one location with cheaper labor in another - has been a cornerstone of corporate strategy for more than a century. This strategy matured over the past decade as technology and higher levels of development in the low-wage nations enabled their workers to take on service jobs and knowledge work; no longer is the practice limited to low-level production jobs. As developing countries provide an increasingly skilled workforce, developed nations' ability to differentiate themselves is dissolving, and the companies operating in those countries no longer need to pay their workers a premium. The most widespread and lasting impact of the maturation of global labor arbitrage is the decline in real wages in the developed nations. CFOs of U.S. companies can prepare now for a permanent resetting of wages for many workers in the upper salary ranges.
Increased global competition and low pricing power are driving the more aggressive forms of arbitrage: overseas sourcing, offshoring and foreign direct investment. In the IT industry, these practices are already moving into their second generation; Indian companies that took work from the United States and Europe are now offshoring less-skilled jobs to lower-cost locations such as China and Malaysia. IT wages in the United States dropped by an average of 3 percent in 2004.
Although corporations around the world increasingly practice labor arbitrage, most are still reluctant to call it what it is. TeleTech Holdings Inc. is one of few companies that use that term. The Englewood, CoIo.-based company operates 66 customer management centers (CMCs) staffed with 33,000 employees spread over 16 countries, including 10,000 in the low-wage regions of Asia and Latin America. "TeleTech was one of the first customer management providers to successfully implement a labor arbitrage strategy more than 7 years ago," says Dennis Lacey, executive vice president and CFO. "Since then, we have expanded our labor arbitrage strategy globally, providing our clients high-quality, lower-cost customer management solutions in various languages and from many countries, including India, Argentina, Canada, Mexico and the Philippines."
Call-center workers in low-wage regions make io percent to 12 percent of what...