Why are Salaries Lower in Less Developed Countries and Why is This Necessary?

The question often arises as to why companies in less developed countries, which produce similar products or offer the same services as those in wealthier nations, cannot pay the same salaries. This article delves into the economic realities behind this phenomenon and explores why lower salaries are not only a necessity but also a key driver of economic development.

The Economics of Labor Supply and Demand

One of the primary reasons why salaries are lower in less developed countries is the abundance of labor relative to the job opportunities available. These countries often face a surplus of workers, where the supply of labor far outweighs the demand. Consequently, workers are not in a position to demand higher wages because employers have a choice of a large pool of applicants. Additionally, the availability of low-paying jobs can limit the job opportunities for the local populace, leading to a higher reliance on external incomes (e.g., remittances from migrant workers) and a less stable economic foundation.

Economic Constraints and Currency Strength

Another factor contributing to lower salaries is the economic environment in less developed countries. These regions typically experience lower per capita incomes, weaker currencies, and tighter financial constraints. Currency parity issues can significantly impact the purchasing power of local wages. For instance, a weak currency might make imported goods and services more expensive, further emphasizing the need to keep labor costs low to maintain competitiveness in domestic and international markets.

Examples and Comparisons

Consider the perspective of a school-aged child receiving $1,000 as pocket money in the United States. Would a family in a less developed country be able to provide the equivalent amount in their own currency? The reality is that the financial situation in less developed countries is often far more challenging, making such comparisons starkly unfavorable. The revenues and profits generated by companies in poorer or developing countries are typically lower compared to those in advanced economies. Therefore, these companies have less financial flexibility to offer higher wages while still maintaining sustainability.

Take, for example, a shoe manufacturing company like Nike. If a factory in a country where workers can reasonably earn $5 per day were to increase wages to $15 per hour, it would become less competitive. The company would need to absorb the higher labor costs and still be able to offer the product at a price that can be sold profitably in the global market. This raises the question: would this level of wage increase help the workers or hinder the continued growth and development of the country?

The Role of Foreign Companies and Economic Development

Companies that operate in less developed countries often play a pivotal role in shaping the local economy. For instance, Nike opening a factory in a country where $5 per day is substantial might create job opportunities that lift many workers out of poverty. Employing workers at a reasonable wage, even if it is lower than in wealthier countries, can be seen as a step towards economic growth and development. As these workers gain skills and experience, they may eventually demand higher wages, which can push the local economy towards maturity and higher productivity.

Furthermore, if companies were to pay identical wages in less developed countries as they do in richer ones, the economic advantage of doing business in these countries would disappear. It would be cheaper and more profitable for these companies to operate in wealthier nations with lower labor costs, rendering the foreign investments in less developed countries unsustainable. The local economy would suffer, leading to an absence of jobs and potential starvation among the population, particularly among vulnerable groups.

Conclusion

The truth is that companies in less developed countries have no choice but to pay lower wages due to a combination of labor market dynamics and economic constraints. However, offering these jobs can be a critical first step towards economic development and improving living standards. It is important to understand that economic growth is a gradual process, and while lower wages may seem unjust, they can pave the way for broader economic benefits in the long run. Companies and governments should focus on long-term strategies that foster sustainable development, ensuring that the benefits of economic growth are shared fairly among all members of society.