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Skills Levels in Reality Are Neither Given Nor Fixed

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Here’s a letter to Conner Crabtree, who is a regular, but skeptical, reader of Cafe Hayek; coincidentally, I am today at a conference at which the Stolper’s and Samuelson’s 1941 paper will be discussed:

Conner:

You write that “the Stolper-Samuelson theory supports tariffs by showing they protect incomes of low paid workers in countries like the US.”

I disagree. First, while this theorem is now recognized to be somewhat more general than the version first offered by Wolfgang Stolper and Paul Samuelson in 1941 [2], the assumptions that must hold for it to ‘work’ in reality remain daunting. Samuelson’s own textbook says this about the theorem [3]: “Although admitting this as a slight theoretical possibility, most economists are still inclined to think that its grain of truth is outweighed by other, more realistic considerations.”

Second, workers’ skill levels are not given and fixed. These levels are determined by the relative returns to workers of gaining different kinds of skills. If tariffs today, à la Stolper-Samuelson, prevent the incomes of low-skilled American workers from falling not only absolutely but also relative to the incomes of high-skilled workers, low-skilled Americans will thereby have reduced incentives to improve their skills over time.

Competition – of which international trade is only one of many manifestations – constantly changes relative prices and wages. These changes, in turn, give firms and workers the knowledge and incentives necessary to adjust their actions – including their gaining of skills – in ways that enable them to raise their incomes as they better serve consumers (either directly or, more commonly, indirectly through their employers).

Tariffs that keep the pay of low-skilled workers artificially high keep the incentives of these workers to become more skilled – and, hence, eventually even higher paid – artificially low.

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

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