Monday, December 1, 2008

Why wages are low in poor countries

... and how we can help.
Caplan asks if those who criticize companies that pay low wages overseas feel that they could get rich quick by investing all of their resources in overseas enterprises — specifically, enterprises in poor countries. After all, it stands to reason that if workers in developing countries are underpaid and exploited, a profit-seeking businessperson would be able to reap immediate profits by hiring the workers away from their current occupations and re-employing them elsewhere.

If people pass on the opportunity, Caplan argues, then they implicitly accept the tragic-but-nonetheless-real fact that workers in very poor countries simply are not very productive. Low wages, then, are not the product of exploitative multinational corporations but of extremely low productivity. The relevant question for those concerned about the very poor is not "how do we convince (or force) multinational corporations to pay more" but "how can we improve the productivity of the world's poorest workers?"


Finally, when it comes to a firm's production decisions, wages are not all that matters. Firms will invest in inputs — say "unskilled labor" and "skilled labor" — until the ratio of the marginal products of the factors to the prices of the factors are equal for all inputs. If an American worker earns $30 per hour while a Chinese worker earns $1 per hour, this is not by itself sufficient to show that investing in China is in a firm's best interests. If the American worker can produce 120 units of output in an hour while the Chinese worker can only produce two, then producing the good in the United States is actually cheaper. Each unit produced in the United States costs twenty-five cents, while each unit produced in China costs fifty cents.

The idea that expanding and integrating the global marketplace exploits the poor is a myth that causes avoidable misery. Protesting and trying to slow the advance of international capitalism is not the solution. Encouraging the development of institutions in which the world's poor can increase their productivity is.


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