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Maximum-Wage Policies and Trade

Here’s a letter to a long-time Cafe Hayek patron:

Mr. Kent L___

Dear Kent:

Prompted by my recent post on why workers in high-wage countries are in a far better situation economically than are workers in low-wage countries, you ask what if “in other countries (Mexico most specifically) the government enforces lower wages than otherwise would exist, for the benefit of the employers who buy government favors in order to avoid having to compete for labor on the basis of wages.”

Good question.

The chief victims of these policies are workers in those countries.  These policies victimize those workers by a combination of (1) obliging some workers to accept, in lieu of preferred higher wages, less-preferred higher non-wage forms of compensation (such as better working conditions) that employers turn to more fully as they compete for workers, and (2) enticing other workers out of the formal labor market and into the underground economy.  The end result is fewer workers in those formal economies and the use there of less-efficient means of production.

It follows that maximum-wage policies, far from lowering the production costs of producers in those countries, raise production costs there.  Maximum-wage policies, therefore, supply no good justification for Uncle Sam to impose punitive tariffs on imports from those countries.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercator Center
George Mason University
Fairfax, VA  22030