When Low Wages Benefit the Poor

2014-05-17

A thought on globalization and economics.

There is an ongoing disagreement in the West on the morality of paying people in the Third World in factories next to nothing. The normal defense for this is that, while we wouldn't want to work for that little, it is still better than what they could get elsewhere. The businesses, in turn, can't pay out extra money or they would go broke and not be able to pay anyone anything. Some people accept this argument and some don't.

I want to propose a different argument in for the factories paying low wages: it does more good than higher wages.

Economics has the Law of Diminishing Returns, which basically means that getting a second of something is never as good as getting the first one was. For example, if I were to give a poor Somalian $10, he could buy food for his family. Perhaps the next $10 would buy some new clothes. I don't know how much better off he would be with $1000, but I do know it is less than 100 times. For the sake of this discussion, we'll be guess high and assume it's 20 times.

Lets image I have a company called Hot Air Regional Development (HARD) that manufactures hot air for political campaigns. Now HARD decides to open a hot air factory in Somalia on the grounds that there will be less competition for labor (probably a bad trade-off). HARD has a total budget of $10,000/week to run the factory and we need 40% ($4000) of it to bribe the various factions into not attacking us. Therefore, HARD has a total of $6000 for the salaries of the employes.

Using our numbers from before, HARD has 2 hiring options. It can either (a) hire 6 workers for $1000/week ( = $25 / hour) each, or (b) hire 600 workers for $10/week ( = $0.25 / hour) each. If HARD chooses option (a) and pays the workers well, the money will do a total of 6 * 20 = 120 points of goodness. On the other hand, if HARD chooses option (b) and pays the workers almost nothing, it will do a total of 600 * 1 = 600 points. Lower wages seem to be better than higher ones because more people get at least something.

Caveat:

This only applies of there are a lot of people out of work. It may also need there to be no social safety net, although I am not sure about that. Picture poor slums with people looking through garbage instead of technology start-ups in Bangalore. Admittedly Bangalore also has slums, but you get know what I mean.

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