Low Wage Production Essay

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Low wage production is one of the most controversial issues in business analysis. Low wages can be found in both advanced and poor economies. Conventional economic  theory  suggests that  there  is no problem so long as factors of production,  including labor, are paid their marginal product.  If wages are low, this is because there are large numbers of unskilled and low productivity  workers competing  for jobs. Moreover, customers  benefit from low prices for goods and services. Artificially increasing wages only subsidizes the few and increases the level of unemployment. Critics complain  that  low wages reflect the exploitation of workers  in general and  disadvantaged  groups  in particular.  They boost the profits of companies  and undermine conditions for everyone.

There is no objective definition of low wages. Wage levels can be measured in absolute terms or in relation to a national  average. If wage dispersion  increases, there is a greater chance of more workers falling into a low wage trap. Simple marginal productivity theory has  difficulties explaining  the  scale of wage differences, whether  at the top where quite extraordinary pay increases have been made or at the bottom.  It is often argued instead that low wages are a product  of labor market  segmentation.  Women,  migrants,  and ethnic groups get caught in secondary labor markets where employment relationships are more casual and wages lower. Such labor market segmentation  builds on and reinforces discrimination.

Labor market institutionalists argue that employers also have a choice of strategies, and some choose to emphasize low wage production and pursue policies to sustain this, including opposition  to worker organization and state regulation. In many developing  countries,   this  argument   can  be  extended to  incorporate the  informal  sector.  Less-regulated labor markets in these countries  also encourage the use of child labor, which pulls the overall wage rate. Poor countries have often been seen as labor surplus economies where production is effectively based on unlimited supplies of cheap labor that can migrate in from the countryside.

Two main means have been used to improve the condition  of low wage workers. Workers  themselves have organized to form trade unions, but since their bargaining position is not always strong, governments have also been pressured to pass minimum wage laws and  antidiscrimination laws. Despite  prophecies  of doom from some economists, both trade unions and legislation can be argued to have a positive effect on the situation of low wage workers and the economy as a whole by reducing abuses and exploitation and forcing employers to look for more efficient forms of production. Many countries  now have a minimum  wage law to provide a floor to low wages. Ironically, some of the longest lived of these are to be found in the different states of the United States. The value of such laws has also been evidenced when the removal of protection for the low paid has not led to the positive effects claimed by neoclassical economists.  Under the auspices of the International Labour Organization (ILO), there has also been an attempt  to set minimum  labor standards  embodied in the 1998 Declaration of Fundamental Rights at Work.

In recent  decades globalization has been argued to have created  a greater  space for low wage production. It has dramatically increased the size of the world working class and brought workers into closer competition with one another  through  deregulation and  falling transport costs. This enables  footloose capital to choose where it locates and who works for it. Governments  reduce labor protection in favor of “deregulatory  beauty contests”  to attract  this capital. This has weakened the bargaining power of labor as a whole and  led to a shift in returns  to capital and labor across the world and increased  inequality between  skilled and unskilled workers  who are trapped in low wage production.

The alleged threat from intensified low wage competition  manifests  itself in the  advanced  world in increased immigration and competition  from imported  low wage goods. Outsourcing  enables multinationals  to engage in “social dumping” by moving production abroad to less-regulated areas. Export processing zones with unregulated  or less-regulated conditions have become common. Antisweatshop campaigners have also evoked the plight of low wage workers in the developing world. This leads to claims that labor is being forced into a “race to the bottom.” But it is arguable that a greater threat exists in competition of the low wage producers  within and between poor countries. The threat of cheap Chinese production is perhaps  more evident in Mexico than  in the United States or western Europe.

However, these pessimistic arguments  need to be subject to cautious  assessment.  Free market  economists,  for  example,  see low wage production as a stepping-stone to more  sophisticated  forms of production.  Empirically, while  there  is no  doubt  that labor’s position in advanced countries has been weakened, it is not clear that migration and trade with poor countries  are large enough factors to account  for it. Other accounts focus on the internal relations in the advanced world and policy choices to weaken labor.

No less in the low wage producers,  it is not always that case that those at the bottom of the supply chain have no bargaining power.

Arguments  about  low wage production are often presented  as if there is an inevitable conflict of interest between workers in advanced and poor countries, the skilled and the unskilled. But what has been called “the high cost of low wages” can be argued  to link together  the  interests  of low wage workers in poor countries,  low wage workers in advanced countries, and higher paid workers who not only often face the same employers but also are forced to subsidize low wage companies that fail to pay their workers a living economic  and social wage. This is sometimes  called “the Wal-Mart  effect” after the U.S.-based multinational that prides itself on low prices but is accused of not only benefiting from low wage production but failing to provide the mass of its workers with health insurance,  etc., which then has to be paid for out of state funds.


  1. Appelbaum et  al, Low-wage America: How Employers are Reshaping Opportunity  in the Workplace (Russell Sage Foundation,  2003);
  2. Anita Chan  and Robert J. S. Ross, “Racing to the Bottom: Industrial  Trade Without  a Social Clause,” Third World  Quarterly  (2003);
  3. Gregory,  W.  Salverda,  and  S. Brazen,  eds.,  Labour Market  Inequalities: Problems and  Policies of Low-Wage Employment in International Perspective (Oxford, 2000);
  4. Hurtado and P. Argerey, “Social Dumping: The Debate on a Multilateral Social Clause,” Global Economy Journal (2008);
  5. Jozef Konings and Alan Patrick Murphy, “Do Multinational Enterprises  Relocate Employment  to Low-Wage Regions? Evidence From European Multinationals,” Review of World Economics (2006);
  6. Leslie Lipschitz,  Céline  Rochon,  and Geneviève Verdier, A Real Model of Transitional  Growth and Competitiveness in China (International Monetary Fund, 2008);
  7. Marcus Taylor, Global Economy Contested: Power and  Conflict  Across the  International  Division of Labor, Rethinking  Globalizations,  14 (Routledge,  2008);
  8. The High Cost of Low Price, DVD (Brave New Films, 2005).

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