Wednesday, June 06, 2012

Why are people paid more in rich countries than in poor countries

My friend and former colleague, Charles Kenny, is now a columnist for Bloomberg BusinessWeek. His recent column, "The Big Mac Theory of Development," is based on a recent paper by Orley C. Ashenfelter and another paper by Michael Clemens. Charles concludes:

Why do people in the U.S. earn so much more doing the exact same jobs as people in India? One reason is infrastructure: physical infrastructure such as (comparatively) good road and electricity networks, alongside economic infrastructure including a (somewhat) robust banking system. Institutions such as a (passable) set of commercial laws and (not completely capricious) regulatory regimes are another factor. The higher quality of these public goods allows the same amount of effort by the same quality employee to create considerably more value in the U.S. than in India. 
So the overwhelming explanation for who is rich and who is poor on a global scale isn’t about who you are; it’s about where you are.
Charles of course recognizes that people are more productive on average if more capital has been invested in their productivity -- for example, if they are better educated and provided with better equipment. His point is that people are also more productive if they work in a society with more social capital and better infrastructure.

I would note that it has been estimated that women on the average earn five to seven percent less than men when equally qualified and working in comparable jobs. Presumably that is a cultural difference, not a difference based on place of work or supporting institutions.

1 comment:

John Daly said...

We also pay a wage premium to people we classify as "white" as compared with people we classify as "black", "Indian" or "Hispanic". Geography counts as a surrogate for institutions and infrastructure, but culture counts too.