How Forex Rates Affect Movement of Labor

[Tobi]

Labor is attracted towards maximum wages. Therefore, since the price of the United States Dollar is high as compared to the Indian Rupee, producers from the United States can pay Indian workers higher salaries and still end up saving money. Hence if Indian workers produce goods to be consumed by Americans, both of them can benefit! Low costs and high wages can arise simultaneously.

However, over a period of time, the wage rates of employees in the United States should fall whereas the wage rates of employees in India should rise and the arbitrage should ideally come to an end. This is what is expected to happen in theory. However, in reality, certain other factors affect the outcome and ensure that the labor arbitrage persists.

 

[gwolf666]

Labor arbitrage works because workers are attracted to higher wages. Since the U.S. dollar has a higher value than the Indian rupee, U.S. firms can pay Indian workers higher wages and still save. This creates a win-win situation for both countries: low costs for producers and high wages for workers. Over time, however, wages in the U.S. should decline and in India they should rise, which would theoretically end the arbitrage, although additional factors can cause it to persist.

 

[Augusta]

A declining exchange rate decreases the purchasing power of income and capital gains derived from any returns.