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