Can I Start at Quarterback for the Pittsburgh Steelers?

by Don Boudreaux on August 10, 2006

in Trade

I share Greg Mankiw’s concern that a major U.S. political party seems to be sinking more deeply into the abyss of protectionism.  The specific incident that sparked Mankiw to express his concern is Ned Lamont’s position on trade (as expressed on Lamont’s website).  You can read the entire statement — it’s not long — also in Mankiw’s blog-post.  Here’s the part of the statement, though, that I want to comment on:

Many of our high-skill jobs are being sent overseas, drawn by low wages and no benefits.

Lamont’s assertion is widely believed, but the evidence for it is scant.

Seems like an obvious point, but it’s worth repeating that low worker compensation (wages and benefits) is not sufficient to attract employers.  If you doubt this fact, ask yourself what the Atlanta Braves would tell me if I offered to play shortstop for that Major League baseball team at only one-tenth of the salary of its current starting shortstop.  I doubt that team officials would say "What a deal!  You’re hired, buddy.  How can we turn down this opportunity to lower our labor costs?!"

Silly example, you might say.  Perhaps (although I think it not to be as silly as it might strike many people).  So let’s revisit some well-known facts about current patterns of global commerce.  (Well-known, that is, to people who care to know about such things — a group that seldom includes politicians.)  If relative wages and benefits were the chief driver of business investment decisions — the chief determinant of where businesses set up shop and close down shop; where businesses expand production and where they decrease production — then low-wage countries would be raking in capital.

But they’re not.  Consider this passage from Martin Wolf’s fabulous book Why Globalization Works:

Labour representatives in high-income countries, notably the US, have also made much of the argument that the export of capital harms them, by forcing them to accept lower wages or lose their jobs.  To this Edward Graham responds that most investment goes to other high-income countries, many of which have wages close to — or even higher than — those in the US.  Eighty per cent of the stock of US investment abroad in 1997 was located in other high-income countries.  Most investment abroad is not particularly labour-intensive, for precisely this reason.  It is true that investment in developing countries is relatively labour-intensive.  But that still does not mean jobs are lost.  This is partly because, as a matter of logic, there is no connection between these microeconomic changes and overall employment.  But it is also the case that US direct investment and exports tend to be complementary — the more there is of the former, the more there is of the latter.  Thus, as one might expect, investment abroad simultaneously destroys and creates jobs.  But Graham concludes that ‘this analysis provides no reason to believe that outward FDI [foreign direct investment] either creates or destroys jobs on a net basis.  On the other hand, there seems lilttle question that FDI can contribute to a redistribution of jobs among activities.  But generally, this redistribution is from the lower-paying to higher-paid jobs.  That, of course, is good news for US workers as a group’ [pp. 242-243].


26 comments    Share Share    Print    Email

Previous post:

Next post: