“Cheap Labor” Is the Most Expensive Labor of All

The left-leaning imagine against all reason that businesses are out to exploit workers with low wages. The right-leaning disagree with the left rhetorically, all the while making the left’s case for them.

For evidence of this, consider the minimum wage. Lefties pursue legislative force to push the wage floor ever higher, while members of the right correctly disagree. The problem is that they then claim against all reason that wage floors cause businesses to automate. Both narratives presume businesses want to fleece workers. They’re both wrong.

Consider a recent analysis about China by the Washington Post’s Christian Shepherd. It’s no reach to guess which way Shepherd leans, but as the above hopefully supports, both sides believe what is nonsensical. Shepherd writes that Chinese authoritarian Xi Jinping hopes that China’s economy will “avoid the stagnation many emerging economies face when they run out of cheap labor.” Thankfully reality always intrudes on what economists, pundits and journalists imagine.

The simple truth is that low-wage workers are expensive. Wildly so. And it’s not just that turnover when it comes to low-paid workers is generally very high. The latter is a real problem, as is it a real problem that low-wage workers arguably don’t come to work with the same urgency that well-paid workers do.

Of course, the biggest problem with low-wage workers is paradoxically the low wages. The low pay obviously signals a lack of productivity on the part of the poorly compensated, which more broadly signals a lack of powerful economic growth. This is basic stuff, or should be. If the toil of individuals only rates low pay, then it must be that their toil isn’t very valuable.

But wait, Shepherd indicates that low wages are the stuff of growth. Well yes, that would be true if investors cared more about ripping off workers than achieving actual returns. The thing is that investors prefer returns, which means “exploitation” for them involves directing precious capital to the most productive workers possible.

Seemingly lost on Shepherd and his ideological opposites is that wages aren’t set by supply and demand, rather they’re a consequence of investment. Workers capable of productive economic activity are magnets for investment as the massive investment inflows into high-wage U.S. cities like San Francisco, Los Angeles, Austin, and New York indicate. The booming economic growth of all four locales is a consequence of enterprising people, and enterprising people are magnets for the very investment that relentlessly pushes up wages.

All of which is logical. Just take a look at the most valuable U.S. businesses. And in thinking about them, just remind yourself that economies are just people, and businesses are just people. The most valuable U.S. businesses generally have some of the highest-compensated employees. The highly-compensated rate the pay because their productivity is the stuff of high returns for investors.

For Shepherd to then pretend that China’s economy will suffer the loss of the less productive from the workplace isn’t just silly, it’s backwards. More realistically, the disappearance of “cheap labor” from China is a sign that the people who comprise its economy are growing by leaps and bounds.

Which is a lesson for the right too. Automation would be the norm with or without wage floors, and it would be simply because workers are much more valuable (and better paid) the more that their work is married with productivity-enhancing machines. Again, they’re both wrong.

Republished from RealClear Markets


  • John Tamny

    John Tamny is a popular speaker and author in the U.S. and around the world. His speech topics include "Government Barriers to Economic Growth," "Why Washington and Wall Street are Better Off Living Apart," and more.

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