Why Wages Differ Between Countries? Why person doing the same job earns more in one country than in the other country?

▪ Why there are differences in wages between countries?

Why do people in developed countries earn more than in less developed countries? Is it due to the fact that in one country employees are more hard working than the employees from another country? No, the differences in wages, while numerable, we believe to be mainly the result of work efficiency and opportunity cost.

▪ Why is work more efficient in some counties?

To first describe the difference in work efficiency, let’s use the example of two people trying to tear down a brick wall using their fists. Their diligence or commitment wouldn’t make much difference. The effect would be poor or non-existent. What makes work more efficient is the use of capital. Capital in this case could be a sledgehammer, which would enable the worker to demolish the wall faster. Work efficiency is a result of workers’ skills multiplied by a use of a capital goods such as machines, tools or technology. Capital goods are goods that are used for production of other goods, and aren’t used up in single production cycle.

Use of capital doesn’t only apply to the simplest tasks. Highly qualified employees, such as an engineer, will be more efficient if they have access to computer programs rather than a piece of paper and calculator.

So, we can have two similarly educated employees, with similar skills, and yet they won’t earn the same. They can both work 8 hours a day. They can both be devoted to their work, and they can both be very tired after a day’s work. But if one of them uses capital goods, and the other does not, their work efficiency would be completely different. The employee who uses capital will produce several times as much in the same amount of time.

Mises wrote about difference in wages in different countries like this:

“[T]he difference is not personal inferiority or ignorance. The difference is the supply of capital, the quantity of capital goods available. In other words, the amount of capital invested per unit of the population is greater in the so-called advanced nations than in the developing nations.”1

Employers obviously pay their employees, but the “real employer” is a consumer. The consumers pay wages both to employer and his employees, because they are the ones that buy the produced goods or services. In the long term, employees cannot earn more than the value they produce. The entrepreneur, or employer, cannot bear a long-term loss, because they would have to go out of business, and both them and their employees would lose their job. On the market, the consumer is king, not an entrepreneur, nor an employee. Consumers prefer to pay less rather than more for their products and services, so the producers and their workers must comply. However, by the use of capital goods, they can produce more and for cheaper in the same amount of time and with the same amount of work. Of course, if the workers’ efficiency is high, they will produce higher value. The higher value will be the basis for their higher wage.

▪ How opportunity cost can raise wages?

Now, you may notice, and rightly so, that there are professions in which people use similar capital goods, and the wage differences still exist. One good example may be a hairdresser, another being a cashier in chain markets, who earn different wages in different countries, although they work for the same company. We could say that this is a supply and demand thing, and end the subject there. In the richer country, there are more companies and they have more money. They compete between themselves for the employees – the demand for work is higher – so they have to offer higher wages. This is true, but we won’t stop here. We would like to know WHY this competition is higher in the richer country.

To understand this, let’s imagine a CEO of a large corporation. His name is Jeff, and he is very good at what he does. Jeff works 12 hours a day, because he is responsible for the company’s operations, but he earns very well – $3000 a day. His job is very stressful, so he needs to get some rest after work and a good night’s sleep, so he can stay sharp. His time is very precious. So, would Jeff weed the garden, cook, sew and clean his house after work? No, he will employ a gardener, go to the restaurant, buy a good suit and hire cleaning staff. Jeff could do all this by himself, and maybe even he would be good at it, but his time is limited. He is better off if he focuses on his work, and gets a Christmas bonus, rather than doing the gardening by himself. Housework has a huge alternative cost for Jeff. In simple words – Jeff wouldn’t save money by doing everything by himself. He wouldn’t have time and strength to work 12 hours a day as a CEO and earn his huge wage. Focusing on his job and hiring people to help him with other tasks is profitable to him, because he will earn much more than what he pays for services.

This example perfectly describes our second cause for wage discrepancy, opportunity cost. The more “Jeffs” in society, the higher the need for various goods and services, like a mentioned hairdresser. And what about the cashier? In a richer society, they have more options to choose from, so for them to choose being a cashier, the employer has to offer them a higher wage than in the society in which alternatives are scarce.

The more accumulated capital, the higher the productivity, wages, and ultimately, “Jeffs”. The higher the wages, the higher the opportunity cost of doing other things than work. The higher the opportunity cost of non-work activities, the higher the need to delegate them. The higher the need to delegate, the higher the need for goods and services. As a result, there are more companies that provide those goods and services, driving higher competition amongst employers looking to hire workers. This way, accumulation of capital raises the wages both directly – by directly increasing productivity of an employee who uses capital goods – and indirectly – by increasing opportunity cost.

▪ Summary

To sum up, it’s worth repeating that accumulation of capital and higher alternative cost of non-work activities are not only factors that influence the wage levels, but we think that they are crucial, and that without them, it would be very difficult – if not impossible – for the wages to rise in the long term.

It’s also worth noting that the wage differences are visible not only between different countries, but between different regions in the same country as well. Often wages are higher in the capital cities than in small town in the province for the same reasons previously discussed.

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▪ Bibliography

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1Ludwig von Mises, Economic Policy. Thoughts for Today and Tomorrow, Ludwig von Mises Institute, Auburn,s Alabama, 2006, p.77