… is from Ben Powell’s June 2008 EconLib essay “In Defense of ‘Sweatshops’“:
The amount a worker is paid is less than or equal to the amount he contributes to a firm’s net revenue and more than or equal to the value of the worker’s next best alternative. In any particular situation the actual compensation falls somewhere between those two bounds.
Wages are low in the third world because worker productivity is low (upper bound) and workers’ alternatives are lousy (lower bound). To get sustained improvements in overall compensation, policies must raise worker productivity and/or increase alternatives available to workers. Policies that try to raise compensation but fail to move these two bounds risk raising compensation above a worker’s upper bound resulting in his losing his job and moving to a less-desirable alternative.
Of course, the economic principles are the same for first-world countries, too.
