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The Myth of the Low-Wage Advantage

Here’s a letter to a long-time correspondent who is quite hostile to free trade:

Mr. Lee Gomez


Thanks for your e-mail.

You claim that “high wage workers can not help but be hurt by trading with low wage workers.”

Not so.  First, wages reflect workers’ productivities: with rare exceptions, the higher a worker’s wage, the higher is that worker’s productivity.  So another name for “high-wage workers” is “high-productivity workers,” and another name for “low-wage workers” is “low-productivity workers.”  Given this reality, would you say that “high-productivity workers cannot help but be hurt by trading with low-productivity workers”?  When worded this way, Americans’ fear of trading with low-wage countries is revealed as silly.

Second, if your claim is correct, then Bill Gates – the world’s wealthiest man – should for his own good not trade with anyone.  Conservatively estimated, Bill Gates earns each hour $360,577.*  That’s far higher than the hourly wage earned by anyone who Mr. Gates trades with.  Do you therefore believe that, to ensure his economic well-being, Mr. Gates should build his own cars, make his own clothing, and clean his own toilets?  After all, autoworkers, tailors, and housemaids each can, and do, out-compete Mr. Gates at performing their respective tasks.  Does it follow from the relatively low wages of these workers that Mr. Gates is made poorer by importing into his household goods and services produced by these workers?  Should Mr. Gates trade only with other multi-billionaires?

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

* Gates’s net worth is $75 billion.  If he earns a paltry one percent annual return on this sum, his annual income is $750 million.  If a normal work-year is 2,080 hours (= 40 hours X 52 weeks), then $750,000,000 ÷ 2,080 = $360,577