What are the negative repercussions of offering workers too much money

Great Debates
1

I don’t know if this is a question or a debate. Assume that an international labor movement and the majority of the world’s governments get together and create an international minimum wage of $9/hr for companies that are manufacturing items which are mostly going to be sold in the developed world (companies that create products designed to sell to other developing nations are excluded from this minimum wage). So if a corporation making items it intends to sell in OECD nations sets up shop in Bangladesh where workers currently make about $0.25/hr, they are now making $9/hr.

What negative repercussions are there of this? It would be a cash transfer from wealthy nations to developing nations, how would that affect inflation in the developing nation? How would it affect the price of consumer goods in the west? Would any of the extra income in the developing world be used to build up infrastructure, education, health care, or methods of increasing business productivity? I assume a lot of workers would use the extra money to afford better health care and education for their families, but I don’t know how that would affect the nation as a whole. At the same time, if you could support 10+ people on one person’s wages that would decrease productivity as most people could be idle. Then again, as wages so up so do standards of living which require even more money.

What if instead of offering a $9/hr minimum wage, companies are required to pay 300% of the average wage (so in Bangladesh the wages would be $0.75/hr for people who work in fields where the goods or services are bought by OECD nations) but the companies have to make up the difference between that and $9/hr by investing in the developing countries infrastructure, health care, education, technology sector, etc? So for every employee making $0.75, the company has to offer $8.25/hr to various government programs and NGOs that work on health care, infrastructure, education, technology, communications, worker and business productivity investments, etc (assume these groups are mostly transparent and efficient, so the money is actually spent on these things and not on palaces for the dictator). What effect would that have?

2

This happens all the time, as the economy of one country comes up and the wages come up the jobs shift to a country that will do it cheaper. If they all charged the same price I imagine we would do the work here and not send it out. I believe low wages can help a country become industrialized, the standard of living comes up slowly.

So the negaive thing would be that no one would have jobs in those countries.

3

Well then what if the wages were changed to $3/hr instead of $9? The companies would still come out ahead by outsourcing.

Also there would be a massive discrepancy in these nations, some people who work for companies that export to OECD nations will be earning $9/hr, while someone who works in a factory making goods for domestic consumption will be making $0.30/hr. What effect does that have?

4

Workers in developed countries are paid more because they’re more productive. The higher productivity is due in part to better education, training, and management expertise, but largely due to automation, efficiencies, and external factors: poor countries are accident-prone, have poor infrastructures, high transportation costs, etc.

Graft is a big expense in many countries, and that answers your second question: a worker paid $3 where others get $0.30 would kick-back much of the difference to whoever gave him the job.

Ways have been tried to address poor working conditions in America’s suppliers: sanctions or tariffs when working conditions are sub-standard. But this doesn’t play well in a developed country controlled by greedy oligarchs.

5

Corporations would either not set up shop in Bangladesh at all, or else would make the goods in Bangladesh (paying their workers the going rate of $0.25 per hour), sell the goods to some corporation in another non-OECD country, and then buy them from the corporation and send them to OECD nations for sale.

Why on earth would I assume that?

Regards,
Shodan

6

If a minimum wage of $3 an hour was imposed in China on goods sold in rich countries the result would be devastating poverty and starvation in China and higher prices in rich countries.

7

This is a form of protectionism. It will end up making both foreign workers and US consumers poorer.

8

Chinese laborers who work in manufacturing are already earning almost $3/hr.

I’m looking for details. Writing the idea off for ideological reasons alone doesn’t do enough, I want to know what the negative repercussions are.

For example, assume the second situation comes to pass. Workers are paid $0.75/hr and the other $8.25 is devoted to a fund to invest in a more productive workforce (automation, robotics, healthcare, education, etc) or a more business friendly society (infrastructure, judicial reform, political stability efforts, etc).

Assume a factory that manufactures goods for domestic consumption applies for a grant using that fund to automate their factory. If the workers were making $0.30, the automation will eliminate a few dozen jobs and cost millions. Normally it would be cheaper to be labor intensive and technology poor, what happens if that factory owner decides to automate since he is getting a grant to cover the cost? What happens when technology advances come to improve worker productivity but the worker’s labor is still cheaper than the savings from automation? My impression was technology advances tend to come about because they cost less over the long term than labor. What if they are heavily subsidized?

9

The problem is that you aren’t going to get details, you’re only going to get guesses as to what would happen - and those guesses are going to fall along ideological lines.

For instance, let us pretend that Obama’s $10 per hour minimum wage extended everywhere (the countries with higher than $10 per hour lower their minimum wages because…they all took a golf ball to the head?) on Earth. This would fundamentally change all economies on the planet. Whether that would be awesome, good, bad, or terribad is going to be a WAG and it’s going to be influenced by the sentiments held by the WAGer. Even with your assumption of 300% of the current average wage based on OECD, how would we enforce that throughout the world? And wouldn’t that create an upward spiral? If the OECD average wage is .25 and you require that everyone be paid .75 to ship to the US, wouldn’t the new average be .75, which would then require people to be paid 2.25 and so on?

Those questions aside, we can make some base assumptions about the immediate future after this goes into effect, such as increasing prices for everything. Massive layoffs in countries like China (if only for short-term cost control measures) and an attempt to increase prices to the point that companies still have just as much profit to give to shareholders so they don’t report a down quarter.

And this, I hope, is a fairly mundane assessment just based upon how businesses currently work. But beyond this immediate affect, a LOT comes down to how the global society as a whole handles the transition. Is it simply a world law that says “Your employees make $10/hour, now.” (or, as in your example, 300% MW) and then the legislators all go play sports? Or is business incentivized in some way? Penalized in some way? Are the various global political machines somehow now free of oligarch/dictator/fundamentalist/etc interference so that this law isn’t watered down to uselessness?

10

You don’t need to guess. This is a fairly simple economic calculation. If you set wages to be equal everywhere, then businesses will move to wherever other conditions make the business the most profitable.

Low wages are the only comparative advantage developing countries have to offer. If I had to pay my workforce $9/hr regardless of where they are, why in the world would I ever set up shop in a remote country with a poor infrastructure, corruption, an uneducated populace, and poor access to markets? Why would I put up with a crappy power grid and bad roads when I can open a factory next door in America or Canada?

You’re assuming that .75/hr or whatever is somehow artificially low and doesn’t represent what the workers are ‘worth’. But that’s not necessarily true (it might be, if the local government is corrupt or dictatorial). But if there’s an active market for labor, .75/hr may be the market-clearing price and actually represents the value of the workers. Because if it didn’t, then some other business would grab them by bidding up the price.

If you don’t think that’s true, you need to ask yourself why wages have been rising steadily in countries like Vietnam and China where markets have taken hold. You need to ask how South Korea, Singapore and Hong Kong became so wealthy and have such high salaries for workers when 50 years ago they were ‘sweatshop’ countries.

This is the way it has to work: A country with no infrastructure and a poorly educated populace attracts investment because the workers are very cheap. The investment comes in, and the infrastructure is improved. This makes the workers more productive, which attracts more investment. The companies then bid against each other for the workers, bringing up salaries and working conditions. As more investment arrives, the infrastructure gets even better, and the higher salaries for workers allows them to educate their children and keep them healthier. That makes them even more productive. And so it goes.

This is the ladder of prosperity for 3rd world nations, and do-gooding attempts to set minimum wages or work conditions generally have the effect of cutting off the bottom rung of the ladder and dooming the population to endless misery. Even the worst jobs are better than subsistence agriculture, and even $.75/hr is far better than the $2/day that many in the 3rd world earn. That’s why these foreign factories are often swamped by huge numbers of job applicants.

If you really want to help the 3rd world, the way to do it is to push to get rid of the petty dictators, graft, and endless civil wars that keep them from rising up. You could also help them to establish free markets and avoid the trap of Communism. Then let prices, including the price of labor, find their natural levels.

11

Valid points. If wages are set too high then nations that have nothing to offer other than low wages will be locked out of the global economy. Companies will go where worker productivity is higher, non-labor expenses are lower, business is easier to conduct, etc.

I’ve read (I have no idea how they determined this) that a Chinese worker is 4x more productive than a Bangladeshi worker. I don’t know how much more productive a US worker is than a Chinese worker, but I know we are higher. So if the Chinese are earning $9/hr and are 4x more productive than a Bangladeshi worker, what is the incentive to hire the workers in Bangladesh? In real life, if it costs $0.30/hr to hire a Bangladesh worker vs $2/hr in China, so it makes economic sense to move to Bangladesh. A lot of US jobs were moved to Mexico, then Mexico became too expensive and they moved to China. Now China is too expensive and they are moving to Bangladesh and Vietnam. When those nations become too expensive I assume the African nations will be next.

I know that nations work their way up from agricultural societies to industrial to post industrial service economies and that this requires a stage of low wage manufacturing. However has anyone experimented with mandatory reinvestment or cash transfers to invest in factors that will increase worker productivity or business friendly changes?

It seems to me that these things occur organically as a nation rises in income. People earn more in a factory than they would in a farm, they use the money to send their kids to school and give them better health care so their kids are more marketable than the parents. This leads to more income, more tax revenue (which is used to build infrastructure, health care, education, etc. investments) which feeds on itself and lifts the nation up. People earn more money, tax revenue and personal spending goes up, more is invested in education/healthcare/infrastructure, workers become more productive, etc.

That is my understanding of how it works. I am wondering if/how cash transfers on top of that mandated to be spend on factors that improve worker productivity would affect the rate of development.