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Let Markets Set Wages

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Martin Wolf splendidly exposes the sorry consequences overlooked by those (such as William Greider [2]) who clamour for corporations operating in low-wage countries to pay their workers wages above market-clearing levels:

In China today, the proportion of the work-force employed in more or less modern activities is still small (perhaps an eighth).  The wage for unskilled labour is set by its value in the rural hinterland.  That, in technical terms, is its ‘opportunity cost’.  Critics — Greider, for example — complain that workers in countries such as China earn much less than the wages received by workers in comparable plants in high-income countries, even though those plants can operate just as efficiently there.  That should be so.  It makes no sense for workers with similar skills to be paid very differently in any given labour market.  If employers are profit-maximizing, as Greider believes, they should employ more people instead, until the marginal product of labour equals its low cost.  Any given plant would then employ substantially more people in China than it would in a high-income country.  The average product of labour will be far higher than its marginal product, in such plants.  Fortunately, this also makes China a profitable place in which to invest and so stimulates the country’s economic growth.

What might active trades unions achieve in this context?  Suppose they were successful in raising wages and conditions for the lucky minority of workers employed in modern factories to levels closer to those westerners consider reasonable.  The price of labour to modern enterprises would rise above its opportunity cost.  The labour market would then be dualistic, with low incomes for the great majority and relatively high incomes for the organized few.  Both profitability in the modern sector and the labour-intensity of production would be lower.  The modern sector would then grow more slowly.  People would queue for these high-paying jobs, creating more open unemployment.  Migration from the countryside would also slow, delaying, perhaps indefinitely, the time when labour shortages began to raise rural wages rapidly.  All these unions would achieve is to have created an island of privilege in an ocean of misery.

(Quotation from page 186 of Wolf’s Why Globalization Works [3].)