Trade Issues

Low-Wage Countries No Threat

Protectionists -- those who support tariffs on imports to protect domestic industries and jobs -- argue that cheap labor in developing countries, using capital and technology from richer countries, is causing a massive shift of production and jobs.

This idea is based on a misunderstanding, say economists. International trade tends to equalize the labor cost between countries per unit of output in a particular industry. But that doesn't mean that trade drags down domestic wages or creates long-term job loss.

Studies have found that low wages in developing countries reflect their lower productivity (output per worker).

  • Manufacturing wage rates in Malaysia in 1990 were only 15 percent of those in the United States -- but Malaysian workers were only 15 percent as productive as American workers.

  • A study of Malaysia, the Philippines, India, Thailand, South Korea and Mexico found that differences in the cost of labor per unit produced were much smaller than differences in wage rates.

  • As productivity rises, so do real average wages; in South Korea, for example, real wages have risen eightfold in dollar terms since 1977.

Trade and the increased competition it brings may cause jobs to shift around, say economists, but won't have lasting effects on the overall level of employment in developed countries. The rapidly expanding area of information technologies is an example.

  • More than 100 of the top 500 companies in the United States buy software services from India, where programmers are paid less than a quarter of the American rate.

  • But most of the services they buy are low-skilled encoding or simple programming, whereas the U.S. exports software and engineering services.

Intel may make Pentium computer chips in Malaysia, and Taiwanese may assemble personal computers, but they are unlikely to develop the capacity to design such products until they become high-wage, developed countries.

Source: Pam Woodall, "The China Syndrome," Economist, September 28, 1996.


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