Real costs of low-wage economies

While low-wage economies may seem attractive at first glance, a new report by The Conference Board suggests the advantages are not as stark as they first seem.

Research from the economic think tank paints a true picture of the value of low-wage countries when other factors such as productivity are taken into account.

To try and make the country comparisons easier, The Conference Board used unit labour cost – the average labour compensation per unit of output – as a comparison.

According to the research, after adjusting for productivity gaps, the cost effectiveness of emerging economies “is not as strong as suggested by wage differences” because the low wages go hand-in-hand with low productivity.

“One critical lesson is that productivity gains from new technology has to keep pace with fast-rising wages of skilled and semi-skilled workers or the ‘cost advantage’ begins to erode,” says The Conference Board’s Bart van Ark.

Despite this, China and India still have the most competitive manufacturing ULC – at about 20% of that of the US. The UK comes in at almost a third higher than the US.