In Markets, High-Wage Workers ≡ High-Productivity Workers

by Don Boudreaux on April 6, 2022

in Archived writings, Myths and Fallacies, Trade, Work

In my latest column for AIER, I again explain that the high wages paid to workers in market economies, such as the United States, put these workers at no disadvantage relative to workers paid lower wages in low-wage economies. A slice:

There’s a key to escaping the confusion that traps people who worry that Americans’ high real wages prevent us Americans from trading profitably over the long haul with people in poorer countries. The key is to ask why are Americans’ wages higher than are wages in poorer countries?

The answer has two parts. The first is that American workers are especially highly productive in the particular jobs at which they work. The second part is that American workers would be nearly as highly productive in the alternative jobs at which these workers would otherwise work.

Consider, for example, a pharmaceutical scientist working in the US for Merck and earning an annual salary of $100,000. We can be sure that the annual value received by Merck from employing this worker – the annual value of what this worker produces – is at least $100,000. We can be confident also that the value of the annual output this worker would produce were he or she to work elsewhere is not a great deal lower than $100,000, for otherwise Merck, greedy Big Pharma operation that it is, would have bid this worker away from his or her alternative employment by offering an annual salary of less than $100,000.

In short, American workers’ unusually high wages reflect American workers’ unusually high productivity. And unusually high productivity is hardly an economic disadvantage. Yet when politicians and pundits worry that American workers under a policy of free trade are destined, because of their high wages, to be driven into much lower-wage occupations by imports produced by lower-wage foreigners, what these politicians and pundits are really worrying about is that American workers are somehow at a disadvantage because they are unusually productive compared to foreign workers. But when described in this manner, this worry is revealed to be the nonsense that it in fact is.

Everyone instinctively understands this truth at his or her personal level. Professional basketball superstar LeBron James doesn’t worry that his very high pay will leave him unemployed as the Los Angeles Lakers hire off of the street a middle-aged dude who’d be thrilled to replace James at a minuscule fraction of James’s current salary. Likewise, the tax accountant who lives across town from you, and your sister-in-law who is paid handsomely to manage the local Target store, don’t worry that they’ll lose their jobs to teenagers earning the minimum wage.

For the same reason American workers who produce what economists call “tradable goods” – goods of the sort commonly imported and exported – are, despite being paid wages higher than many foreign workers, generally at little risk of losing their jobs to these foreign workers.

I qualify my conclusion with the word “generally” because every worker is at some risk of losing his or her current job to a change in economic circumstances – a change in consumer tastes or improvements in techniques of production and distribution. Such change is an unavoidable feature of any economy in which the masses enjoy a reasonable expectation of a high and rising standard of living. But the following fact remains: In a market economy, high wages are a result of – and a reflection of – high productivity. And so contrary to widespread fears of many protectionists, high-productivity workers have nothing to fear from competition with low-productivity workers.

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