Labor arbitrage, the key cost-saving benefit of offshore outsourcing, will continue to drive offshore sourcing decisions for the next 30 years, according to a new report released by Everest Research Institute.

The findings contradict the current industry thinking that labor arbitrage, as the primary value proposition of offshore outsourcing will only be sustainable for another three to five years.

“Fears about rapid wage inflation and growing skills shortages in India and other offshore markets are largely misplaced,” said Joe Fernandes, Managing Research Director, Everest Research Institute. “Our findings show that wages are rising for a relatively smaller base of workers, and that shortages are cropping up only in certain skill areas. These issues will eventually work themselves out as the offshore labor market continues to mature and expand into new geographies,” he added.

The report also states that the global offshore market will reach upwards of $160 billion by 2009, and predicts that the market will continue to grow in line with demand at an approximate rate of 33% a year for the next three years.

Jobs outsourced to an offshore location are more likely to move to another offshore market than return to their country of origin, as labor arbitrage is sustained by a rapidly developing and expanding offshore marketplace, it says.

Non-IT offshoring, which was virtually non-existent five years ago, will represent nearly half (45%) of the offshore market in three years. While the use of third-party suppliers dominates offshore IT services, companies prefer using “captives” for offshoring BPO services, finds the Everest study.