Misconceptions Of Cheap Labor Argument
One of the widespread and frequently debated misconceptions of comparative advantage is a cheap labor argument. According to which some countries such as China, with lower wages produce products at lower cost and become competitive in international trade and there is no way to other countries but protect their economies from foreign competition. However many economist explained the cheap labor argument as “fallacy”.
According to the law of comparative advantage, countries should specialize in which they have comparative advantage (more efficient in production) and export it and import the goods in which they have comparative disadvantage (less efficient in production). Mutual beneficial trade occur when two countries specialize …show more content…
The firs answer is the productivity of workers. Even though, cheap labor abundant countries such as China can produce goods at low cost and be competitive, the productivity of workers of China is lower than compering to, for instance US`s workers. For example average us worker may receive a wage 15$ per hour and his productivity is 300 units of goods per hour. However Chinese worker receives 3$ per hour and produce 9 units of goods, because, usually most of the work done manually. Therefor American worker can be considered as cheap labor.
The second reply is, as mentioned above, usually cheap labor countries mostly concentrated on labor intensive production of goods rather than technology intensive. In this regard usually countries complement each other rather than compete. Moreover, to produce technology intensive goods labor force also needed to have adequate education and training to handle complicated machines. In developed countries usually labor forces are well educated and trained and effective doing even manual …show more content…
One of them I found interesting is “Test of Pauper Labor argument: Turkey Case”. In short, paper concluded that high wages do not have any restrictive impact on international competitiveness. Paper states that higher wages is combined with higher export performance of the country. Which is in detail explained higher wages as reflect of high productivity, which is in turn lead to increasing export competitiveness.
During my study on cheap labor argument I read a lot of contradictory articles, opinions. I found NAFTA as one of the most debated issues on this topic. Many economists, laymen criticized the president Clinton`s decision and blamed for the loss of about 5 million jobs in manufacturing sector since NAFTA was enacted. However, the other side of coin is 22 percent total increase in employment of USA since law