Low wages generate low-paying jobs, not a thriving economy

It makes good sense.  Instead of relying on economic theories to predict the outcomes of government policies, examine models of policies already in use.  This pragmatic approach could be a useful tool, says Fred Bienefeld, professor of economics at  Carleton University.

underpaid

Take the island state of  Mauritius, for example.  That country in the Indian Ocean has kept wages low in order to attract capital.   Such a model can yield a certain kind of success, but it is a very limited success. Mauritius has become trapped in what is effectively a low-wage cycle.  Its economic success and its economic future depend on its ability to make labour available more cheaply than its competitors. It’s a race to the bottom.

The Taiwan model, on the other hand, is based on the creation of ideas: developing the capability to generate technology and sell products that use that technology.  Ideas have a currency that exceed the value of  cheap labour.  Coupled with a strategic industrial plan, Taiwan has reaped remarkable results.

What’s instructive about Taiwan and other East Asian economies over the last 40 years is an economic transformation that is virtually unprecedented in history.  Real wages rose dramatically and their competitive edge was maintained.

Hourly wages in British Columbian are higher than the Canadian average, according to Statistics Canada.  Our average the hourly wage is $17.26, compared to $16.14 nationally.  B.C. and Ontario are the only provinces with hourly wages above the national average.

You would think that high wages would be cause for cheer.  But critics counter that B.C. unemployment is higher because of the our high wages.  They say our minimum wage is too high at $7.15 per hour, compared to Alberta at $5.90.

The assumption is that if our minimum wage was lower,  more jobs would be created.   But unemployment is lower in Alberta because the petroleum industry is booming, not because of low wages.  Evidence of that can be found in the north-east section of B.C. where the petroleum industry is also thriving and unemployment is down.

Low minimum wages may create more low paying jobs, but the effect is to spread poverty, not wealth.  More Albertans work in low paying jobs than in B.C.  — 28 per cent in Alberta compared to 19 per cent for B.C., according to a study done by Statistics Canada Labour Force Survey, 1997. Low wages generate low paying jobs, nothing else.

But, say the critics of B.C.’s high wages, Alberta is more productive.  It depends how you define productivity — and not even economists can agree on that.  A simple definition of productivity is the value of output goods divided by input costs. Under this definition, lower wages should increase efficiency.

But other costs are often overlooked, such as environmental degradation. Loss of safe water and clean air will eventually have to be paid for — usually not by those who cased it.  The problem is that we all have to eventually pay for these costs, and a definition of productivity that doesn’t include them is misleading.

Productivity is better defined as the degree to which our standard of living is improved by human effort, says  Bienefeld.  Under this definition, the value of cheap widgets produced by low paid workers would not qualify as high productivity unless the standard of living for workers is improved in the process.

Of course, Alberta is not Mauritius (although the population is approximately the same), and B.C. is not Taiwan.  But there are some lessons to be learned.  Alberta could become trapped in a low wage cycle — industry drawn to Alberta only because of low wages.

B.C. benefits from higher wages.  A low paid, skilled workforce is a restless workforce.  Skilled workers move to the highest paying jobs.   They are ready to go to the highest bidder, and take their skills with them.   High wages attract talented people who generate ideas and creative solutions to industrial and business problems.

Society also benefits by paying its less skilled workers a wage that they can live on.  High minimum wages create a workforce that is not reliant on government handouts and social assistance  to survive.  Failure to pay liveable wages creates a hidden cost that we all pay for though wasted human potential and increased crime.

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