- Cafe Hayek - https://cafehayek.com -

Protectionism and Jobs

Tweet [1]

The single most egregious yet widespread myth about free trade is that it reduces net overall employment in economies that practice it. This myth persists because people persist in seeing only the particular jobs that are destroyed by trade while ignoring the jobs that are thereby created.

But there’s a mirror-image myth that, while much less trumpeted, is equally egregious. It’s this one: jobs are destroyed on net by protectionism. It’s not uncommon to encounter careless cases in support of free trade that feature this claim.

The fact is, while protectionism is responsible for a long list of economic and ethical evils, destroying jobs on net over the long run is not on this list. And free traders should never succumb to the temptation to put it on the list.

Trade policy (as opposed to a policy that affects the labor market, such as, for example, minimum-wage legislation) has no effect on the long-run rate of employment. Trade destroys and creates particular jobs; protectionism destroys and creates particular jobs. Neither has an effect on overall employment – with one exception, mentioned below, of tertiary importance.

Free trade moves workers and other resources generally into more productive and, hence, more highly paid uses; protectionism keeps workers and other resources generally employed in less productive and, hence, less highly paid uses. Neither protectionism nor free trade increases or decreases the long-run rate of employment.

To see the validity of this point, recognize that there are likely out there in deep space on other planets some alien species that, if we were to meet them, we would establish mutually beneficial trade with them. But, of course, extremely high transaction costs now prevent us from so trading. Yet does anyone suppose that our lack of trading with these non-earthlings keeps the earth’s current rate of unemployment higher than it would be if we did trade with beings on other planets? Of course not.

A bit less wildly, suppose that in April 1789 the administration of President George Washington had adopted a policy of complete economic autarky for the United States. Suppose further that this policy had been consistently followed for all of U.S. history, including still today. Under such a policy we Americans would be fewer in number and much poorer materially. But is there any reason to suppose that we would, as a result, be suffering massive and chronic unemployment? No.

…..

Here’s that tertiary effect that I mentioned above: free trade over the long run might increase the number of jobs (but not lower the unemployment rate) by bringing more workers into the labor force as a result of it causing real wages to rise. Likewise, protectionism over the long run might decrease the number of jobs (but not increase the unemployment rate) by causing more workers to remain out of the labor force as a result of it causing real wages to fall. But these “incomes-effect” responses are not the ones that people have in mind when they complain that protectionism decreases unemployment or allege that free trade increases employment.

Comments