The hidden side of low wages

The comparative cost advantage of taking your business to low wage countries such as China or India, where unit labour costs in manufacturing are 20% lower than in the US, are not always the bargain they seem when wages are adjusted for low productivity, according to a new report by The Conference Board.

by The Conference Board
Last Updated: 05 Dec 2014

Unit labour cost is defined as the average labour compensation per unit of output. The report finds that when adjusting for productivity gaps, the cost competitiveness of emerging economies is not as strong as suggested by wage differences. This is because their productivity is also lower.

"One critical lesson for businesses that benefit from one-time labour cost benefits when investing in low-wage countries is that productivity gains from new technology and innovation have to keep pace with often fast rising wages of skilled and semi-skilled workers or the 'cost advantage' begins to erode", says Bart van Ark, director of The Conference Board international economic research programme.

The key for emerging countries is therefore to ensure that productivity improves at the same pace as their wages - which, in rapidly growing economies, is fast - in order to maintain their competitiviness. And since most emerging countries display a smaller gap in productivity than in wages (ie the lowest paid in emerging countries tend to be more productive than those in western economies), they retain a labour cost advantage.

But there are wide differences amongst emerging economies. China and India, by successfully maintaining low wages, boast unit labour costs 20% lower than those in the US. By contrast, countries like Mexico where wages are much higher than in Asia and where the prodictivity gap is much bigger shows unit labour costs in manufacturing almost as high as in America.

Source: Competitive advantage of low-wage countries often exaggerated
Executive action no 212
The Conference Board

Review by Emilie Filou

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