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High-Wage Protectionism

In an earlier post, I discussed Dean Baker’s point that there are trade barriers that keep out foreign competition for high-skilled jobs. He claims that if these barriers were lifted, then those artificially high wages would fall, prices would fall for those services using those high-skilled workers and lower-skilled workers would then get a boost in their standard of living. He points out that economists spend more time fighting against the barriers to the imports of manufactured products (which protect low-skill workers’ wages) than they do fighting barriers to  imports of foreign workers who might provide services.

I think he’s right on the first part (the economics) and partly right on the second part (about economists’ efforts). We don’t spend much time making the case for allowing foreign students access to U.S. medical schools or law schools. But that’s because U.S. medical schools and law schools and licensing restrictions make it hard for AMERICANS to get access to those professions along with foreigners. Economists going back to Milton Friedman and Kuznets and Reuben Kessel in the 1940s and 1950s were making  this point but it’s a general point not particular to international trade. I’m certainly opposed to those restrictions as are most "free-trade" economists. The proponents of those restrictions are economists and others who worry about protecting consumers from "unqualified" professionals. They are the allies, witting or unwitting, of the doctors and lawyers who want to keep their incomes high.

But Dean Baker has more to say on other types of restrictions. The question is whether they are empirically significant—the role of green cards and so on.

I certainly agree with him that competition in the high-wage sector from foreign sources is a good thing. That includes outsourcing, more open immigration and fewer licensing restrictions. Here is his argument in full (I have corrected a few typos), taken from a comment to the earlier post. I have closed the comments there, so if you want to keep this discussion going, please comment on this post.

Okay, let’s try this again — I’ll try to talk slowly this time. I
was referring to a wide variety of professions, not just economists.
Some of these professions (e.g. law and medicine) have very specific
training and licensing requirements. For these professions, it would be
necessary to tell students in developing countries exactly what courses
they would have to take and exams they would have to pass to meet our
standards. This is not true in the case of some other professions, such
as economists, as folks on this blog have been quick to note.

The second part of this story is that it is essential to remove the
requirements concerning efforts by employers to first hire U.S.
citizens or green card holders. Any guesses what these requirements
mean? I know that they are not well-enforced, but they are meant to
prevent competition based on price. Even if employers essentially cheat
(I don’t think anyone has ended up in jail for failing to be
conscientious on this) the law is effective in preventing a Wal-Mart
university, law firm, or hospital, that hires whole staffs of foreign
professionals at half the prevailing wage in the U.S. (which would
still be a huge pay increase for professionals coming from the
developing world).

Finally, the relevant issue is not the supply from the developing
world of qualified professionals today. The question is what the supply
of qualified professionals from the developing world be in 10 years, if
we changed the rules to allow Wal-Mart employers of professionals today
(or if we had free-traders designing our trade policy 10 years ago).
Businesses always tell us how they need assurances of stable rules and
tax policy if they are going to undertake long-term investments. That
is why NAFTA and other trade pacts have long sections on investment —
they want to ensure U.S. firms that if they set up manufcaturing
operations in Mexico that the business will not be expropriated, that
they will not be restrictions on repatriating profits, and that there
will not be tariffs or other barriers imposed at some future point to
prevent the output from being exported to the United States.

Students in Mexico need the same guarantees. They are not going to
take years to study U.S. law and mastering English, unless they know
that they will be able to compete on an equal footing with U.S.
professionals and that Wal-Mart employees will be free to hire them
without obstruction.

This situation did not exist in Mexico or anywhere else 10 years
ago, and it doesn’t exist today, which is why economists and other
highly paid professionals still get such oversized paychecks.

I know that all the "free trade" economists will say that they
support this sort of free trade for professionals, but I have never
once seen a column in a newspaper or magazine complaining about the
protectionist barriers that maintain high salaries for professionals,
nor have I ever seen a textbook that highlights this porfessional
protectionism. Nor have I ever seen an articles that have sought to
estimate the potential gains from eliminating the barriers that protect
U.S. professionals (references anyone?)

It seems that the "free trade" economists only get upset about the
relatively small barriers that still provide some protection for
manufacturing workers. Apparently, they can’t even see the barriers
that keep their own wages high.


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