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Return(s) to Stolper-Samuelson

In the Comments section of David Henderson’s July 4th, 2021, EconLog post titled “Two Objections to Free Trade,” commenter “Frank” argues that the Stolper-Samuelson theorem shows that free trade can indeed create losers of the sort that free-trade proponents typically overlook. Specifically, according to Stolper-Samuelson, it’s theoretically possible for a freeing of trade between a high-wage country and a low-wage country to reduce in the high-wage country the wages of its low-skilled workers both relative to the wages of its high-skilled workers and absolutely.

Stolper-Samuelson is familiar to all competently trained economists. But what is also familiar – or should be – to all competently trained economists is the fact that the conditions required in reality for this outcome of Stolper-Samuelson to materialize are highly unlikely. As Paul Samuelson himself conceded in his famous textbook (quoted in the last column here), “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.”

Among these more realistic considerations is the fact that workers’ skill levels are neither exogenous nor fixed. That is, the existing pattern of workers’ skill levels is largely due to the prevailing returns to different people of acquiring particular skills, and this pattern changes as economic conditions change.

Almost no human being is destined from birth to be a low-skilled worker, a middle-skilled worker, or a high-skilled workers. The skill level that a worker obtains, while obviously determined to some degree by that person’s preferences and ‘natural’ abilities, is determined also by the expected net returns to him or her of pursuing the acquisition of one set of particular skills relative to the expected net returns to him or her of pursuing the acquisition of some other particular skills.

If America has, compared to China, an abundance of high-skilled labor relative to low-skilled labor, this reality reflects the relatively high net expected returns to workers in America of acquiring high skills. Economic forces are at work also in China. There, the net expected returns to workers of acquiring high skills is not sufficiently high to induce in China so many workers to become high skilled to result in that country having, compared to America, an abundance of high-skilled labor relative to low-skilled labor.

Recognizing that each worker’s skill level – and, hence, the prevailing pattern of skills in a country – is heavily determined by the net returns workers expect from acquiring different skills, it’s too simplistic to conclude that a freeing of trade between a high-wage country and a low-wage country will in the long-run harm low-skilled workers in the high-wage country. The resulting relative rise in (say) America of the wages of high-skilled workers will induce more American workers than otherwise to acquire higher skills. Some American workers who, had trade not been made freer, would have remained as low-skilled workers, instead become high-skilled workers. And “some” might in reality be “many.” Indeed, the larger is the initial Stolper-Samuelson effect, the more strongly are workers in America induced to acquire higher skills.

There are, I believe, other problems with using Stolper-Samuelson to analyze trade policy, but I leave those for perhaps another post at another time.