Low Wage Production

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 [Page 1035]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.

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