By Michael Araki

I present a simple index to gauge the relative valuation of labor over capital in a country (LoCI). This index should correlate positively with the wealth and HDI of the country, and negatively with the precariousness of life of basic service providers at the bottom of the pyramid in that country. Because of that, it should also correlate strongly with labor migration from countries with low LoCI to higher LoCI.
The formula is:

LoCI_i=10^(-4) (w_i/r_i f_(i,us))

Where w represents the monthly minimum wage for country i; r represents the monthly risk-free interest rate for country i; and f represents the foreign exchange rate between the currency of country i and the US dollar.
This equation gives the amount of dollars necessary for a person in country i to receive the equivalent of a minimum wage salary as passive income incurring minimum financial risks (real risk-free rates can be used by subtracting the inflation rate of country i from r). Values are scaled by 10,000 to facilitate comparison.

As per October 2022, some LoCI scores are: Brazil 2.13; South Africa 2.15; Mexico 3.29; Malaysia 9.10; United States 40.04; England 110.18; Germany 292.06.

More sophisticated models with other variables regarding r (e.g. real risk free rates) and w (e.g. median salary, or salary at the ith percentile) can also be used without altering the basic insight.

Attachment: LoCI.png (89 KB)


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Michael Araki



Published: 3 Oct, 2022

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