Yesterday I read a blog post by Paul Krugman and was astonished; how could he write of South Asian sweatshop workers as if they had a low productivity?
Sure, in raw turnover per hour they have a low productivity, but that's not why they earn almost nothing.
Two generations ago there were two kinds of tailors in Germany: Industrial workers (mostly females) who produced most clothing and craftsmen (also many females) who mostly customised and repaired clothes.
Today there's almost only the latter kind left. Very few of the former were replaced by robots (for production of curtains, for example), while most lost their jobs to foreign low wage country workers.
Now why did the (few) craftsmen tailors survive in this sector in Germany? The common answer is that customising and repair cannot be outsourced to South Asia, for example.
But that's not what's really interesting, and it doesn't explain why there is such a huge difference in income between tailors in Germany and in Bangladesh.
They still don't earn well in Germany, of course - unless you apply Bangladesh's standards.
The reason why they 'earn' so much more here than there is about power. Bargaining power is a huge input to market prices. If in doubt, check the economic theories about monopolies et cetera.
The customising and repairing tailors in Germany do not compete with Bangladeshi workers, so their bargaining power is not diminished and they can actually get a decent price for their services.
They couldn't do so any more once they would compete with Bangladeshi workers. Their bargaining power would be diminished, their revenues and thus income would drop to a level where they could barely afford one noodle meal per day for it in Germany and they would be forced out of their job.
The services (customising, repair) which are now still worth a couple Euro per hour would drop in 'value' to cents, as the powerless workers of Bangladesh can survive on this level of income and are not forced out of their job if paid so poorly.
Is the productivity of a factor tailor in Bangladesh really much inferior to a German tailor's?
Certainly not. It's the structure of market power and the exportability of their product which diminished the revenues for their output and thus their income. The very same work and output would be worth much more if it was done by Germans in a protected German clothes market - even if the German tailors would only work a fraction as quickly.
Oligopolistic market structures which benefited wealthy countries' workers fell away with trade liberalisation. Other workers lost bargaining power due to busting or erosion of labour unions. The result was in many sectors that the labour input into production became much cheaper, even though the actual generation of value (appreciation of the product or service by consumers) did not change much.
In some cases this primarily reduced the share of labour income and increased the share of capital income (and high level executives' incomes) in the market. It appears as if most cases went a different path, though: The reduced input costs coupled with fierce sales price competition reduced the price of the final product very much (also relative to GDP/capita). Monetary means of measuring output reflect this as a huge drop in produced value, which it isn't if we understand value as 'utility' or 'valuation by customers'. Consumer rents were increased, but the loss of income among workers considerably reduced this improvement on the national level.
Such market dynamics - especially the widely neglected factor of power asymmetries between agents in a market - coin the global economy. We think of Bangladesh's economy as low output because power asymmetries diminished the prices (not really 'value') of its outputs.
We should keep this in mind when we think about the capabilities of low GDP countries. Purchasing power parity exchange rates don't even come close to compensate for this issue.
We underestimate the value of economic output of low wage countries.
edit: It took me a while to notice, but now I noticed that I edited all the actually wonkish stuff out while it was sill in draft stage. Everything should be generally understandable now..