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The High-Wage Fallacy

In a prosperous country such as the United States, a fallacy that sounds very plausible is that American goods cannot compete with goods produced by low-wage workers in poorer countries. Both history and economics refute it. High-wage countries have been exporting to low-wage countries for centuries. The key flaw in the high-wage argument is that it confuses wage rates with labor costs—and labor costs with total costs. When workers in a prosperous country receive twice the wage rate as workers in a poorer country and produce three times the output per man-hour, then it is the high-wage country that has the lower labor costs. It is cheaper to get a given amount of work done in the more prosperous country simply because it takes less labor, even though individual workers are paid more. The higher-paid workers may be more efficiently organized and managed, or have far more or better machinery to work with. A prosperous country usually has a greater abundance of capital and, because of supply and demand, capital tends to be cheaper than in poorer countries where capital is scarcer and earns a correspondingly higher rate of return. That “giant sucking sound” we were forewarned about fearing that American jobs would go to Mexico in the wake of the North American Free Trade Agreement of 1993 turned out to be completely wrong. The number of American jobs increased and the unemployment rate in the United States fell to record lows. This did not come at the expense of Mexico, however. Both countries gained for the same reasons that countries have gained from international trade for centuries—absolute advantage and comparative advantage. Just as free trade provides economic benefits to all countries simultaneously, so trade restrictions reduce the efficiency of all countries simultaneously, lowering standards of living, without producing the increased employment that was hoped for. A protective tariff for other import restrictions may provide immediate relief to a particular industry and thus gain the financial and political support of corporations and labor unions in that industry. But, like many political benefits, it comes at the expense of others who may not be as organized as visible, or as vocal.
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