The Wages of Misunderstanding

by Don Boudreaux on December 28, 2007

in Myths and Fallacies, Prices, The Hollow Middle, Trade, Work

Paul Krugman circa 1996 understood the point of this letter (below) that I sent yesterday to the New York TimesPaul Krugman circa 2007 apparently doesn’t:

Opposed to free trade, David Raines asks “How can it be good for workers to be subjected to competition from low-wage countries?” (Letters, December 27).  This question reveals a common misunderstanding.

Worker compensation in America is high because American workers are made highly productive by the great amounts of capital they work with.  (And by the way, America is rich in capital, in part, because she consistently runs capital-account surpluses – i.e., “trade deficits.”)  Where wages are low, it is because workers in those places have little capital to work with and, therefore, are not very productive.

G.M. and Toyota continue to sell cars even though bicycles – a competing means of transportation, but one far less productive than cars – fetch much lower prices.  For the same reason, with free trade American workers will continue to sell their labor for high wages even though many workers abroad fetch much lower wages.

Sincerely,
Donald J. Boudreaux

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