Philip Whiteley's Blog

November 21, 2012

Low pay, high pay it’s still about motivation

Filed under: Uncategorized — felipewh @ 2:53 pm

Inflation is increasing because low wages are starting to rise in China, economists are warning us. The dismal science truly does have a problem for every solution. A decade ago, low pay in China was a problem because it took jobs away from west without increasing aggregate demand in the low-wage economy.

But never mind, as usual, economists miss the bigger part of the story, so biased are they against notions such as employee motivation, skills, performance and anything that can’t be measured on an abacus or a spreadsheet. Just about everything that matters, in other words.

When a country is in the early stages of conversion from mostly peasant farming to an industrial-based economy, almost any urban job paying real wages offers the chance of a better future for a family. People are often escaping extreme penury. They are motivated. They work hard; very hard. Many have little or no concept of leisure time.

In the two-dimensional analysis of formal economics, these crucial dynamics are arbitrarily absent. In the real world, however, they are what make workplaces productive. All an economist sees is the wage that is lower than in richer countries, ergo they conclude it is the lowness of the wage that offers the competitive advantage. This is reinforced by the rhetoric of anti-corporate campaigners, who seek to ‘name and shame’ western companies that use low-wage suppliers, arguing that they gain an unfair and unethical advantage in this way. Entire outsourcing strategies are based on this superficial understanding, and as a consequence they often go wrong, as this recent feature by Simon Caulkin shows (£).

Is this equation of low wages and competitive advantage, however, a case of correlation, not cause-and-effect? Are the bigger factors the motivation and the work ethic? Would wage rises, handled in the right way, actually increase the competitive advantage? This is an exciting discovery we have made in research for New Normal Radical Shift, that higher wages and productivity in Bangladeshi clothing factories are leading to better quality and margins for Marks & Spencer.

A recent example of the institutional bias towards low wages was the report of China Labor Watch last year. Even the supposed campaigners for the low-paid repeat the myth that it’s good for business. But a press report at the time indicated a growing problem of high staff turnover – which in many cases represents a higher cost than a wage rise. Because the dismal science fails to measure or take into account such an important matter, it fails to be incorporated into analysis, decision-making, economic understanding or the dominant business model. Hashtag fail, as they say in Twitter.

What if low wages have never offered any competitive advantage at all, whatsoever? What if it has all been a terrible mistake?

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