Why is the cost of labour cheaper in developing countries?

Question

I just came to realise that in the past, i accepted the knowledge that labour is cheaper in emerging economies, but I never actually knew the reason.

Answer 1

The reason is AVERAGE PRODUCTIVITY. That is what determines the wages in any country. The amount of goods or services a working person produces for others (ie the market) is what determines income. That is the value of their labor; they get paid for what they do. The value of those goods and services is that person's "productivity".

People in developing countries offer much lower productivity on average than people in the US/Europe/Japan. The result is that they generate much less real value of goods and therefore income to be distributed among the population. To illustrate, because those emerging economies are still largely backward and undeveloped, many people will be unemployed. Their productivity is zero; they create no wealth and generate no income. Many other people are subsistence farmers: they toil all year just to grow enough food for themselves to avoid starvation. Such person may work all year long and only generate a few hundred dollars worth of food.

By contrast a farmer in the US or Europe employs lots of technology and produces enough food for100 other people. He might produce $100,000 worth of food in a year, and he receives income accordingly.

Now, I said the important thing is AVERAGE productivity. There ARE people in emerging countries with modern jobs -- doctors and engineers and factory workers -- who individually produce a lot of value. But they make much less money than Western counterparts because there are so few of them, they cannot raise the average productivity in their country enough to counterbalance all the subsistence farmers.

Also, don't expect a western country to pay western wages when they build a factory in China or Thailand. That only seems unfair if you do not understand economics. To repeat, wages are based on average productivity, no matter what that one factory can do. Western companies won't pay significantly more for 2 reasons:

1) the lower wages are the ONE AND ONLY REASON the factory is being built in the country in the first place. There are lots of disadvantages to an American company for example building a factory in China instead of the US. The ONLY advantage is cheap labor. Remove that advantage, and the factory will never be built, and those new factory jobs will not come to the emerging country, and those people will be worse off. It is simply unrealistic.

2) Western wages would distort the economy. Offer a Chinese factory worker $60,000 a year, and what will happen is all the Chinese doctors and lawyers and engineers will quit their jobs to work in the factory. And they'll get hired because they're the smartest and best educated applicants. Normal laborers will be shut out and kept unemployed, and furthermore will be worse off becuase they no longer have a doctor to go to or an engineer to design things in their country. That would do more harm than good to the economy and the people.

Answer 2

The less you have, the less you accept you need.
If the economy of the emerging country is controlled by the influence of big business and the taxes they pay to keep the governing body on the gravy train, the status quo will continue. Wages will remain low to satisfy the interest of the employers. Really the workers usually have no idea what their labour is worth on a world market basis, even if they do there is only unionization to combat low wages and then the company would relocate elsewhere. People are willing to accept what they get, as the something they get is better than the nothing they would have if the job was gone. The world and life is not always fair, unfortunatly it is the way it is. There are other reasons as well but Greed is the biggest one.

Answer 3

wow, I was about to type an answer of such length it would be impossible to read, then i read kevins. brilliant.

Of course exploitation happens, its shamefull, but thats not the main reason.

Productivity is lower in those countries, because there is not the technology (computers, machinery etc) or infrastructure (roads, buildings etc) to help the company.

If you build a factory in a developing nation, first, you have to build a factory, thats a cost, you will probably have to build roads to move your goods, you will have to build everything. You probably have to pay off some currupt local governors or somethign as well.

You cannot afford to do all this, and pay a US minimum wage (the work people do is not worth it, and of course locally there is not one)

And the kicker that everyone forgets. The economy is not as developed. It does not cost half a million dollars to buy a house in Africa. The economy operates on a totally different level. It is like comparing labour prices in america today, and 100 years ago.

There is explotiation I am not denying it, or sanctioning it in any way, but people forget there are legitmate reasons as well.

A couple of years ago, I watched a video someone made about Nike exploiting workers around the world. This video noted that they first went into Japan, and the cost got too high, so they jumped ship into korea, the cost got too high and now they are in indonesia.

Japan and Korea are doing quite well 50 years on. Nike are helping developing nations. Someone has to build an infrastructure and start to hire workers to develop an economy. Its not goverments that build an economic infrastructure. Its private business. Unless they can save costs somewhere, they will not do it.

Oh, and the notion that people in these countries would be happy and healthy without the exploitation is stupid.

All workers worldwide should be paid a fair wage. Period. But that wage is a fair wage in their economy, not america's economy, or britians, or .. or..

You have to factor in local conditions as well. And all these groups attacking business NEVER EVER do. And until they do, intelligent people will never take them serious, because they have no knowledge about what they are talking about.

Answer 4

Companies are simply paying the prevailing wages that already exist in that country. In reality, they usually pay a little bit more. Especially if you consider that many people are unemployed or slaving away in fields before the companies get there, any wage is a good wage.

Companies can not go into a third world country and hand out what Westerner's consider good pay. It would create massive inflation by increasing the money supply and everyone in those developing countries would suffer for it.

As the people in those countries develop skills and the economy grows, so will grow the wages.
.

Answer 5

the reason for that is supply of worker with the demand for jobs
or workers lots of them available jobs not as many as there are people. since the population of the emerging countries are also very over populated its not uncommon to see a man and wife with many children. this results in the population growing faster then job demand. so they keep having way too many people for the number of jobs that are available.
if you were there and you had a choice to work for 5 dollars a day or the only other option is no job and no money you would take the job.
the solution to the problem is to insist that countries where food aid is made available also have a strict rule that no couple could have more then 1 child then they would have to use birth control that can me all sorts surgical or the other methods. but the couple would only get food aid is they were known to have had only one child regardless of the gender. sadly also regardless of the possibility that one child the first one dies from starvation.
china has done this not for many years and there managing better each year with the job to worker balance.
naturally a couple that had mulitpy births ie twins would be allow the two children

Answer 6

It's to do with 2 major things:
1) Supply/Demand of Labour
2)Productivity/Skills

Supply/Demand - in developing countries, there aren't enough businesses/jobs for everyone...so the people are more desperate to work, and are willing to work at lower wages.

Productivity/Skills - developing countries often have a lot of unskilled labour, but too few people who are skilled in something rare and profitable. Having a rarer, in-demand skills commands higher wages. Since unskilled labour is so abundant, it makes it cheaper. People who may be less educated, working in poorer countries may have little choice but to work in low wage jobs.

Answer 7

i imagine it has extra to do with the productiveness of the labour rigidity besides as provide and demand. the established productiveness of a Japanesse worker is a techniques better than the established chinesse worker, for this reason they receives a fee extra useful (all different issues equivalent). there is also a tighter labour provide on japan. So inspite of the actuality that if an engineer in China can do a similar high quality of work as one in Japan, he receives paid a lot less depending on the marketplace forces in China (decrease productiveness on person-friendly, decrease call for, better provide).

Answer 8

i think that this is because people there have no minimum wage? or if they do it is lower there. Also, our companies take advantige of the poor people there who really need they money.. they give them a very low amount of money knowing the person is going to take it because they need the money very badly. I think thats why...

Answer 9

supply