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… is from page 137 of my great teacher Leland Yeager’s, and David Tuerck’s, excellent 1966 volume, Trade Policy and the Price System [2]:
Low wages in a foreign country typically reflect lower-than-Amreican productivity, not in each industry separately but on the average throughout the economy. Low productivity of labor in turn typically results from a great abundance of labor in relation to comparatively scarce factors of production such as capital, business ability, and perhaps natural resources. Educational levels and the general climate of politics and traditions and attitudes also have a big influence. The low wages enable the unfortunate foreigners, despite their generally low productivity, to charge low enough prices so that the goods they make with relatively slight disadvantage can sell in the American market. Wages reflecting their low productivity enable the foreigners to export some goods and so earn the dollars with which to buy imports. If they could not do this, their poverty would be even worse.
I wonder, by the way, just how many professional economists nod their heads – rightly – in agreement with the above but who also mysteriously believe that this analysis applies only to economic relationships that span across political borders. Sadly, I think the number of such economists is embarrassingly high.
That is, there are many economists who (1) correctly understand that low-productivity foreigners can successfully participate in markets only if their wages accurately reflect their low productivity, but (2) fail to understand that low-productivity non-foreigners can successfully participate in markets only if their wages accurately reflect their low productivity. Such economists are those who, while sound on the economics and policy of international trade, support minimum-wage legislation.