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The Low-Down on Wages

In response to my noting in this post that “I worry that a common misunderstanding of investment flows – namely, that low-wage countries typically are more attractive destinations for manufacturing investments than are high-wage countries – is taken as a valid article of faith by people who write on trade without thinking deeply enough about the matter,” Gregg Hontas (via e-mail) disagrees; he thinks it to be “indisputable” that

the lower the wages the more attractive workers are to businesses.

Indisputable indeed – if we hold constant everything else, especially worker productivity.

But all else is not constant in reality.  Wages, on the whole, in low-wage countries are lower than are wages in high-wage countries not by random chance but, rather, because the productivity, on the whole, of workers in low-wage countries is lower than is the productivity of workers in high-wage countries.  And employers care about what they get in return for the wages they pay no less than consumers care about what they get in return for the prices they pay.

If you doubt that low productivity does not nullify the cost advantages, to employers of workers, of low wages, I have the following offer for you.  I – a professional college professor – will spend 18 hours in my garage working non-stop to build a new car for you.  (It takes Toyota about 18 hours to manufacture a car.)  At the end of those 18 hours, you must buy from me whatever I’ve managed to produce, and the price will be a mere at one-twentieth of the price that you’ll pay for, say, a new Toyota Camry.  That is, the price you’ll pay for a new ‘Boudreaux-mobile’ will be a mere $1,150.  What a deal!  Indisputably a bargain, no?!

Do you accept my offer?  The price that I’m charging you for my time spent working to produce something for you is paltry compared to the price that you must pay for an alternative product sold by my competitor (Toyota).  If you suppose that price truly is all that matters to people who buy goods or hire workers, then you – and every other prospective car buyer – should leap at my offer.  My price is way-low!