The formula for high wages

Why does an employee in the USA earn three times more than one in Latin America for doing the same work?

Raising the minimum wage by law results in unemployment. (PanAm Post photo montage)

They say that the road to hell is paved with good intentions.  Every time leaders have tried a socialist system; there has been a massacre. Those who experimented with this system are murderers even if they have good intentions.

A serial killer can murder dozens of people. A handful of people with power, imposing their vision of the economy, and implementing statist policies can kill millions. Therefore, it is crucial that we educate as many people as possible about the laws of economics. They should be aware of fundamental concepts like why in some countries, employees earn high wages while in others, people starve to death.

Ask a leftist or a trade union member what a country should do to ensure that its people earn more and live a better life. The first response will be that the law should mandate businesses to raise the wages of workers. The worrying thing is not that these ideas are coming from the left; it is that their ideas have killed millions of people. Further, It is alarming that different political groups and a significant part of the population will approve of these ideas.

Those who propose such policies are living in a fantasy world. If we could end poverty by increasing the wages, why don’t we pass a law forcing all businesses to pay their employees a 1000 USD minimum wage?

Multiple case studies have proven that increasing the minimum wage by law leads to unemployment and/or an increase in the price of goods. In past articles, I have delved into the disastrous consequences of raising the minimum wage by law. Many people continue to repeat the lie that in the absence of a government-determined minimum wage, businesses will pay absurdly low wages to the workers.

In short, when the government forces an employer to pay more to the workers, he has to get that money from somewhere. He will now have to pay to the employees the money that he might be otherwise spending on reinvesting in the business, expanding the scale of operations, or buying new machinery. Thus, the law can hinder the growth of the company and the possibility of hiring more employees.

We don’t know how many new employees the business would have hired. Further, we don’t know how many cheap new products we would have had at our disposal if the entrepreneur could have used the money for investments.

It also happens that many businesses don’t have the money that the government demands they pay their employees. Thus, these businesses have to choose between increasing the prices of their products and dismissing some employees.

Therefore, those who believe that the solution to low wages is to force businesses to pay more are entirely wrong. They always end up hurting the very people they claim to defend. The result is unemployment or increased prices of essential consumer goods.

On the other hand, there is an idea that the solution to low wages is state-investment in education. Many believe that a country can become wealthy if the state provides “free” learning from the primary level to university. Some speak of investing in technological education; others talk about mathematics and physics, languages, etc. They are all delusional and wrong.

Imagine a country where the people are very educated; there are excellent doctors and technicians. If this country does not have businesses, if investments are unstable, if enterprises are persecuted, it does not matter how educated the population is. There will be unemployment. And those who have the good fortune of being employed will not earn much.

Education is not the cause of development, rather it is the other way round. Investors do not set up businesses where people are very educated, but in places where property rights are respected, where they are safe and don’t have to pay high taxes. They can bring knowledgeable people to their companies from anywhere in the world, and they can also train employees quickly. Many companies pay for their workers’ education or even bring in experts to train their staff. They also pay scientists to conduct research and make progress.

Thus, a worker with equivalent skills and the same knowledge earns a lot more in the USA than in any part of Latin America. Recently, a friend, who is a systems engineer and made a little more than 2000 USD in Colombia, found a job in the USA. There, they pay him 7000 USD. Why do they pay him over three times more in the USA for the same work that he did here?

The secret to high wages isn’t the level of education or labor unions with their supposed “social conquests.” The key is the accumulation of capital.

A capital good is a factor of production. It is a good that does not directly satisfy human needs but is an intermediary step in the process of production. However, the physical characteristics of a good do not determine whether it is a capital good. One has to see it as a good necessary to achieve a given end. Thus, a computer, a tractor, an oven can all be capital goods.

The capital is the estimated market value of capital goods. In the USA or example, some machines enable the production of large quantities of shoes in a short time. These machines do not directly satisfy human wants. They are capital goods. The more the devices of this kind in the country, the higher is its capital.

A laborer in a company in the USA produces more in less time and of better quality, not because he is better or more astute, but because he has access to better capital than, for example, a laborer in Colombia. Thus, a laborer in a developed nation earns a lot more than one in Latin America.

The economist, Ludwig von Mises, explains this phenomenon in economic terms: Wages always have to be equal to the marginal productivity of labor (MPL is the contribution of an individual laborer to the production process). The marginal productivity of labor rises when there is more capital. Thus, workers earn higher wages.

Why did the industrial revolution bring people out of poverty? It was because of the per capita increase in capital.  It was no longer a few artisans producing by hand and exclusively for the richest, the revolution brought machines, capital goods for mass production.

Keeping in mind that increasing capital is necessary to have better salaries, several things are fundamental to achieving this objective. The first is the savings. Savings are essential as later they are used as investments to but capital goods that will increase the productivity of labor. It is crucial that people understand the importance of saving and have the discipline to postpone consumption and focus on a better future. It is also essential that the state does not burden people with taxes. If politicians take away half the earning of workers, it is challenging to foster savings.

Apart from protecting savings, it is also essential to encourage those who want to take loans to invest in machinery to produce goods. In Colombia, businesses often pay 70% of their earnings in taxes. If one decides to start a business, the government punishes them through suffocating taxes. There will be no one who assumes the risk and wants to buy capital goods.

Thus, if we want Latin American workers to earn the same salaries as workers in the USA, we have to forget trade unions and ministries of education. We have to demand that the government stops taking away our money. We need to save and protect those capitalists who take risks and provide their workers with their entrepreneurial vision and capital goods to make them more productive.

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