High Wages in Markets Are a Result of—and a Reflection of—High Worker Productivity

Among the many recurring myths about free trade is that a country, especially a high-wage country such as the United States, can one day find itself the high-cost producer of every good and service and then … what?

Recently, a correspondent, one who is by no means hostile to free markets, after reading this earlier AIER essay of mine emailed me to ask what will happen “when they [foreigners] not only make [micro]chips cheaper than we can but also make potato chips and everything else cheaper than we do?” I responded on my blog, Café Hayek with an explanation that this outcome is literally impossible. Not merely implausible or improbable. It’s impossible. This impossibility is ensured by the principle of comparative advantage.

But more can be said, or, rather, asked. What, exactly, would happen if the impossible occurred and we Americans awaken one morning to find that there is literally no good or service that we can produce at a cost as low as foreigners incur to produce that good or service? The most obvious result would be that, because no foreigner would be willing to pay for any American export enough to cover any American producer’s cost of supplying that export, no American would wish to trade with any foreigner. Even from the perspective of protectionists, therefore, there would then be no need for tariffs, for there would be nothing at all to tariff.

Yet the sense I get from the many people who, over the years, have asked ‘What will happen if we Americans find that foreigners can produce everything at costs lower than we can?’ is that these people worry that American workers’ wages will be driven down by competition from imports. Of course, though, Americans’ wages cannot possibly be driven down by imports if Americans import nothing.

A related worry, it seems, of many people who fret that America is on track to become the high-cost producer of everything is that we Americans, if our leaders stubbornly and arrogantly continue to allow us to trade freely as we choose with foreigners, will lose nearly all opportunities to produce. Almost everything we consume will be supplied to us by foreigners. And with foreigners supplying nearly all the goods and services that satisfy our needs and wants, we Americans will be left exclusively with businesses and jobs through which we perform for each other, at poverty wages, only menial personal services that would not be worth foreigners’ while to travel here to perform. We’ll flip each other’s hamburgers and clean each other’s bathrooms and that’s about it.

But again, foreigners will not supply to us goods and services to satisfy any of our needs and wants unless we supply to foreigners goods and services to satisfy some of their needs and wants. And the greater is the amount of goods and services that we buy from foreigners to satisfy our needs and wants, the greater is the amount of goods and services that foreigners buy from us to satisfy their needs and wants. (Nothing essential is changed if among the wants of foreigners that we help to satisfy is access to promising investment opportunities, despite the fact that increased net foreign investment in the U.S. causes the terribly misunderstood US trade deficit to rise.)

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.