How Free Markets Help the Poor

(To watch a video animation of the following, click here.)

Do you know what’s by far the most powerful force in lifting the poor out of poverty and raising the incomes of everyone else? Free markets. The government getting out of the way and letting businesses flourish results in jobs and rising wages.

No, it’s not labor unions that make wages rise. They only help a relatively small segment of workers at the expense of everyone else. If anything, they impede business creation. And that’s a tragedy, because the more businesses there are, the more competition there is for labor.

In order to attract the best workers and prevent them from working somewhere else, business owners are forced to raise wages and benefits. The result is an overall rise in the general wage rate and standard of living.

Let me illustrate. Start with a poor country. There are lots of people either unemployed or working in the agricultural or low-wage informal sector. But then the government opens the area to foreign or domestic investment. A shoe factory moves in, and people get jobs. Because it’s low-skilled labor, the jobs aren’t high-paying but they pay a lot better than what the people were earning before.

More factories move in and more people get jobs. And then, another factory moves in and finds that it’s having a hard time hiring good labor. So how does it attract workers? You guessed it: it’s forced to raise wages.

But it doesn’t stop there. In order to prevent their workers from going to the other factory and to hire new workers, all of the other businesses have to raise their wages as well. The average income and standard of living of the population go up.

In addition to enjoying higher wages, the people are learning new skills. There are more semi-skilled and even high-skilled people around. That attracts the attention of industries that require higher-skilled labor, like assembly plants and parts manufacturers. They pay even higher wages in order to attract top talent. Pretty soon more of them move in, and the low-skilled manufactures can’t compete so they move out, to other areas of the country where low-skilled and low-wage labor is still abundant. Then the virtuous cycle begins there, too.

This is happening in places like China and India. Just a few of decades ago southern China was poverty-stricken. Now it’s becoming a bustling and prosperous high-tech metropolis, thanks to this process of businesses competing for labor, and ultimately thanks to the government’s decision to let the free market flourish.

A similar thing happened in America as well. To once again get low unemployment and rising wages for the poor, the government has got to get out of the way.

*** Update – May 6, 2013 ***

The above is by no means just a theory. It’s what’s happening in practice. All of the above is reflected in this news article.

Following are excerpts:

“Ms. Cui is contributing to China’s tightest labor market in years, putting upward pressure on wages that already are rising in the double digits annually.”

“The average monthly income for migrant workers rose 12.1% from a year earlier.”

“Creating jobs in hair salons and insurance companies, instead of in steel mills and soccer-ball factories, helps fuel growth in the world’s second-largest economy.”

“When the bra maker set up a factory in southeastern China’s Jiangxi province more than a decade ago, hundreds of people lined up outside looking for work. Today, the manufacturer for Wonderbra and Elle Macpherson Intimates struggles to find enough workers to operate its production lines at full capacity.”

“For years Top Form competed for labor with factories moving inland to take advantage of lower costs.”