In a recent post, Kevin Erdmann employs the principle of never reason from a price change to clarify why low wages do not necessarily confer a competitive edge in international trade:
The confusion arises from a simplistic āall else held equalā mindset. The myriad costs associated with production are woven into a complex web of interactions. High interest rates may signal that investors are prioritizing risk over safety, while more corporations seek debt financing for expansion. At the micro level, high interest rates seem detrimental to profitability, yet, on a macro scale, they often correlate with increased economic activity.
Similarly, high wages are indicative of robust local economic and institutional quality. They emerge from a spectrum of choices available to workers and reflect the productivity stemming from the intricate network of cooperation and competition present in a flourishing economy.
Production relocates to areas experiencing rising productivity and improving institutions. It gravitates toward regions capable of enhancing output. Thus, the notion that production shifts to low-wage areas is misleading; rather, it is the places with the greatest potential for advancement that tend to have been historically disadvantaged.
Let’s examine the 20 countries boasting the highest wages worldwide, according to Numbeo.com.
(While ideally, pretax hourly wages would provide more accurate insight, this list remains relevant and closely aligned with appropriate data.)
Notably, among the ten highest wage economies, only three (the US, Iceland, and Australia) face trade deficits. In the subsequent ten, only two (the UK and New Zealand) exhibit trade deficits. This implies that 15 out of the 20 high-wage nations enjoy trade surpluses. Even when excluding the four oil and gas economies, 11 out of 16 still maintain surpluses. Hence, high wages are typically linked to trade surpluses.
Countries running trade deficits generally fall into two categories:
- Low wage economies
- English-speaking nations
Conversely, countries with trade surpluses tend to be characterized by three primary features:
- High wages
- Energy-exporting economies
- Confucian cultural influences (notably in East Asia)
In summary, the assertion that ājobs are leaving the US due to high wagesā lacks empirical support. Wages are primarily reflective of productivity levels.
Never reason from a wage level.
PS: I frequently contend that bilateral trade balances are largely insignificant. A recent article in the Financial Times further illustrates this point:
Chinese exporters are increasingly attempting to circumvent tariffs imposed by US President Donald Trump by routing their goods through third countries to obscure their true origins.
