He who lives by wage disparity...

The answer is no one wants to wear that label. Wage disparity will always exist, but the low-cost country of today may not stay so for much longer. For processors, that means the prize will continue to go to those who best recognize how to balance labor and automation, and thereby can meet their customers’ demand for low cost and high quality.

The difficulty for processors’ customers, particularly multinational companies that have shifted work from high- to low-wage countries, is that even as they spend tremendous effort to control every link of their supply chains, they are unable to control the flow of information, especially at the supercharged speed it travels over the Internet. It seems certain that anyone with access to the Internet has, at some point, tried to obtain a benchmark figure that tells him what comparable workers earn; the next step is learning not only the local benchmark, but a regional or global one. Once enough employees learn that they are considered low-cost labor, and also get a feel for what the same job performance would earn them elsewhere, it will not take too long before they request better pay. Such wage increases, once realized, likely will lead to inflation, and then they will want another raise to match cost-of-living increases.

Granted, this isn’t Adam Smith, and it compresses years of change into a few lines, but with certainty the level of wage disparity around the world is dropping much more quickly than it was in the past. There is evidence aplenty. The past months have seen massive strikes in Eastern Europe as workers there pushed for higher wages and demanded immediate 20, 30, 40 or even 50% increases. Some financial experts now speculate that wages in that region will catch those in Western Europe in 10 years or less; it took more than twice as long for relative wage parity to spread within Western Europe.

In Asia, for many years now the leading low-cost labor destination, a similar story seems to be unfolding, with new labor laws in China bringing that country’s workers’ conditions up to levels seen in the rest of the world. Wages there are still quite low, but climbing quickly, and processors we visited while there in April all said the new laws are having an impact on how they run their operations. One likely outcome is that processors in that region will pursue greater use of automation, both to safeguard against rising wage levels, as well as to improve quality levels. Another likely outcome will be a greater focus on employee training to maximize output per worker.

There will always be a country or region where wages are lower than others, but the Pandora’s box of easily accessible information opened by the Internet means that the disparity will close more quickly. Many North American and Western European processors have found that they are able to bid on new business only if they can at least offer some sort of low-cost option—even for work that, without a doubt, will stay domestic. For processors this reality, coupled with the current speed of wage changes in what still are low-wage areas, means they must continue to pay attention to labor costs, by all means, but also realize that long term there is little option to a proper mix of automation and (well-trained) labor, with the great likelihood that the ratio of automation will only increase.

Matt Defosse, Editor-in-Chief

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