A worker in Bangladesh can earn $1 per day making cotton cloth on a handloom. A worker in Canada can earn $100 per day making cotton cloth with a mechanical loom. What accounts for the difference in wages?

Question

Quizplus · Accepted Answer

The productivity of labor is the most significant factor accounting for the wage difference. The use of mechanical looms to make cotton cloth decreases per-unit labor costs and raises productivity, which translates into a higher wage. Since handloom-equipped workers have much lower productivity, they earn much less even if they work longer hours. The situation is exacerbated by the fact that Western workers may require a higher wage to cover the higher cost of living, while wages in developing countries are depressed by the abundance of labor. The discrepancies in wages across countries are determined not only by the factors highlighted above but also by a variety of other factors, including tax rates, skill level, government regulations, and so on.

A Worker in Bangladesh Can Earn $1 Per Day Making