Often transportation costs are lower in the more developed country, so that total costs of delivering the product to market are less.

There are, after all, reasons why one country is more prosperous than another in the first place — and often that reason is that they are more efficient at producing and delivering output, for any of a number of reasons. In short, higher wage rates per unit of time are not the same as higher costs per unit of output. It may not even mean higher labor costs per unit of output — and of course labor costs are not the only costs. An international consulting firm determined that the average labor productivity in the modern sectors in India is 15 percent of labor productivity in the United States. In other words, if you hired an average Indian worker and paid him one-fifth of what you paid an average American worker, it would cost you more to get a given amount of work done in India than in the United States. Paying 20 percent of what an American worker makes to someone who produces only 15 percent of what an American worker produces would increase your labor costs.

None of this means that no low-wage country can ever gain jobs at the expense of a high-wage country. Where the difference in productivity is less than the difference in wage rates, as with India's well-trained and English-speaking computer programmers, then much American computer programming will be done in India. All other forms of comparative advantage will also mean a shift of jobs to countries with particular advantages in doing particular things. But this does not imply a net loss of jobs in the economy as a whole, any more than other forms of greater efficiency, domestically or internationally, imply a net loss of jobs in the economy. The job losses are quite real to those who suffer them, whether due to domestic or international competition, but restrictions on either domestic or international markets usually cost jobs on net balance because such restrictions reduce the prosperity on which demand for goods and labor depends.

Labor costs are only part of the story. The costs of capital and management are a considerable part of the cost of many products. In some cases, capital costs exceed labor costs, especially in industries with high fixed costs, such as electric utilities and telephone companies, both of which have huge investments in transmission lines that carry their services into millions of homes. A prosperous country usually has a greater abundance of capital and, because of supply and demand, capital tends to be cheaper there than in poorer countries where capital is more scarce and earns a correspondingly higher rate of return.

Add comment

Security code

Copyright © 2018 | "The Theory of the Business"