The podcast can be found at Romer on Growth.
Russ Roberts: What's the mechanism? Does Nike improve the life of that worker out of kindness or does competition force them to?
Paul Romer: Oh, I think it's overwhelmingly competition. There's sometimes a little bit of pressure which makes them do what is basically charitable giving. But look at China right now or India right now. Why are foreign firms that are operating in China and India or Vietnam—why are they paying workers more than they used to?
What happened was that it wasn't just Nike that came in. The government let in a lot of other firms. All of those firms started to compete for the best talent there in the nation, and that process of competition started to drive up wages. You don't want to use the Indian strategy of saying, "Okay, we'll let in one big firm and then we're pulling up the drawbridges and, you know, you can do whatever you want." What you want to do is open it up and say, "Hey, any firm that wants to come in, go for it. Compete as hard as you can to get our best workers."
And that'll reward the workers who have the best skills. It'll give incentives for those other workers to acquire skills and it'll give them opportunities to do things with their skills that they couldn't have otherwise done.
Russ Roberts: In what sense are those workers using the knowledge that that multinational has? I love that idea. What do you mean exactly?
Paul Romer: Nike's discovered a recipe for taking rubber and cloth and a few other things and then creating something that people value in the United States for a price of, say, $100. They can take raw materials worth probably pennies and create something that I might go to the store and pay $100 for.
To create that additional value, they have to go out and find somebody who does the rearranging according to their recipe. If they could get somebody at an extremely low wage to do that rearranging, then they'd pay that low wage. But over time what they find is they're competing with other employers. They have to pay higher and higher wages to get people to do that rearranging.
Now if there are lots of people like Nike trying to find workers to do high-value rearranging tasks, they'll be willing to pay quite a bit as they compete with each other. But imagine that Nike only had ideas that could produce things that were worth, say, $10. Nike could never afford to pay—and its competitors could never afford to pay—very high wages to get people to rearrange something to make something worth $10.
But when they're making something that's worth $100, they'll compete and ultimately start to pay higher and higher wages. So the fact that they've got an idea, a recipe, that can create quite a bit of value means that they'll pay quite a bit to have somebody follow that recipe.
There's lots of people out there with good recipes competing for workers. They'll bid up those wages and, in a sense, part of the value that Nike creates will in some sense be taken away by those workers, and taken in a way that we feel is good for the world as a whole. It's good that workers throughout the world will have higher wages in the future than they have now.
