Labor Arbitrage

Several months ago I talked about the rapid rise and fall of a small hedge fund called Long-Term Capital Management (here, here and here). This fund did nothing but arbitrage trading. Arbitrage trading was just a small part of my financial education right after the fall of the stock market in 2007/2008. I learned about derivatives, mortgage-backed derivatives, credit default swaps, collateralized debt obligations and arbitrage trading. I never knew these types of vehicles existed. The simplest definition of arbitrage trading is taking advantage of price difference in different markets. As an example, suppose in New York one American dollar can be exchanged for 10 pesos (Mexican). In London, one American dollar can be exchanged for eight pesos. Therefore, the dollar would be stronger in New York, or worth more than it would be worth in London. So, if you had a large sum of money and a computer you could take advantage of this relatively small difference in price. Selling in one market and buying in the other. Sweet, ain’t it?

Labor arbitrage is no different. With the advances in shipping that occurred during the 1970s and 1980s, it became relatively cheap to move merchandise across oceans. Shipping containers can easily be loaded onto trucks or trains directly from the shipyard. The backbreaking labor of moving every single box on and off a ship is suddenly gone. This time-consuming task has disappeared. Plus, building factories in Mexico, China and Indonesia is probably far less expensive an endeavor.

For decades, the United States boasted the most well-educated labor force in the world. We had the most skilled workers. Computer technology has made many of these skills obsolete. Now, for some manufacturing jobs, you just need a couple of guys/gals sitting in front of a computer pushing buttons. These computers have replaced hundreds of workers. Therefore, this makes moving a factory overseas even easier. You don’t have to worry about training hundreds of thousands of of workers who don’t have the experience or the education. Instead, you need to train just a couple of people to push computer buttons.

Since the 1980s, free trade has been all the rage. Breaking down barriers. Decreasing or eliminating tariffs. The government has been more than happy to oblige. The government has created a regulatory atmosphere, in which shipping jobs overseas is not only made easy but you are actually penalized, with decreased profits, if you don’t do this. Off-shoring has now become a manufacturer’s paradise. Overseas, you have no labor laws, you have no EPA, no environmental regulations, no OSHA regulations It becomes a no-brainer. You can pay some dude in China a dollar a day versus paying an American factory worker $20-$45/hour. This is labor arbitrage.

Your thoughts? How do we fix this?

0 Responses

  1. You fix it by taxing the company who ships their work out of the country more int corporate taxes. The author of a book called. Punch out was on the Daily Show and was talking about how one of the car companys just moved the middle section of the car production to Mexico. The still did the first part of production and the last part but the assembly part was moved to Mexico. Now all three of these used to be in the same city but now they shifted the assembly line and all the equipment to Mexico. If they are allowed to do this and still pay lower taxes what insentive do they have to help America citizens. As the former HP director who was running for governor in California said. How much will you pay HP to bring the million jobs back? What does that say?

  2. Private sector business was heavily funded by taxpayer dollars to open businesses since WWII. Subsidies and tax reductions lured business to states. Those businesses are now closed in the US. The states should reclaim their expense; ask for the funds back or take control of the empty factories. Once states take control of the factories then offer those properties to labor unions, or former labor unions to open and operate, with state loans for initial expenditures. Let the workers do what they always did, without the top tier of owners and stock owners. Under those circumstances the American worker can compete because of 1) shipping 2) better quality 3) Made in America and 4) no millionaires, billionaires, and stock holders that take from the top.

    Reopening these factories is what is right for this nation and these factories will be able to compete in the world market. Union owned or profit sharing business, that does not trade on Wall Street is the best answer for the American worker.

  3. it’s a great idea but I don’t see how Americans who love the idea of “free enterprise” will ever go for anything like state owned/union owned businesses. Great idea but how do we convince the American people to get it done?

  4. Huge difference between “state owned” and “union” businesses. There are many union businesses and they compete very well in the free market.

    Here’s the deal: There is only so much profit that can be made. If it trades on Wall Street then the stock market gets the profits, if it doesn’t then the workers might get the profits. Companies like Costco pay their employees rather than trade on the stock market.

    Union companies have higher safety regulations and therefore fewer accidents. The past two coal mines that caved in in the US were non-union mines.

    Not sure how to make it happen, but here’s a thought: The state demands that the textile corporations that own the factories repay any incentives that they state gave them to come to, or open their factories in NC. The state could accept the factories instead of repayment. The clothing factory unions on the eastern side of NC could open their own business as a profit sharing enterprise. Voila, we have employment (plus the market gets the best bed linens ever made again)

  5. First of all, I think it is important to change the perception of unions. Ever since the Reagan years, unions have been portrayed as nothing more than huge bloodsuckers which do nothing besides drag down business. Highlight unions as an essential business tool for workers. Then, I know there are some companies out in California which use the company model that you’re talking about. These companies need to be highlighted as examples of innovation and competing in a completely new world. The CEOs and these companies make two or three times what the average union worker makes but not 100 times and those profits can be poured back into increase salaries and increased innovation in the manufacturing process. The workers are happy. The product is competitive. Most importantly, the product is made here in the United States.

    Thanks your comments.

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Errington C. Thompson, MD

Dr. Thompson is a surgeon, scholar, full-time sports fan and part-time political activist. He is active in a number of community projects and initiatives. Through medicine, he strives to improve the physical health of all he treats.


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