Competitive Advantage of “Low-Wage” Countries Often Exaggerated

The cost competitiveness of emerging economies is not as strong as suggested by wage differences when labor compensation is adjusted for productivity. Lower wage costs go hand in hand with lower productivity. Generally, emerging economies have an advantage in unit labor cost if the gap in labor productivity between emerging and advanced economies is smaller than the wage gap. The key for emerging economies is to promote productivity through technological change and innovation to match wage increases which inevitably occur in a rapidly growing economy. Advanced countries need to keep labor compensation in check with productivity.

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