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Labor's Comparative Disadvantage

By Matthew Hennessey | April 25, 2007

May Day immigration rally. Photo by Joseph Voves (CC).

If you care about the hotly contested issues of trade and immigration, then you should know something about comparative advantage, the 200-year-old economic theory that describes the benefits of specialization. These three ideas are inextricably linked, yet not much attention is paid to the implications. A recent Google news search turned up 31,321 stories on immigration and 11,298 stories mentioning free trade. The tally for comparative advantage? A paltry 204.

Start combining search terms and the herd thins even more. The AFL-CIO says, "No government should gain a comparative advantage in global markets by offering to violate its own workers' human rights." The union group advocates linking market access to protection of labor rights in trade agreements.

Washington Post business columnist Steven Pearlstein believes that the simple purity of comparative advantage is outmoded in the face of complex globalization. He considers "strategic trade" a more relevant descriptor of what's going on today, especially with China and its manipulation of the yuan relative to the dollar. Princeton economist and New York Times columnist Paul Krugman first identified strategic trade in relation to the protected Japanese semiconductor industry in the 1980s.

In a 1996 essay, Krugman wrote, "No matter what economists do, we can be sure that ten years from now the talk shows and the op-ed pages will still be full of men and women who regard themselves as experts on the global economy, but do not know or want to know about comparative advantage."

So, ten years later, is everyone on the same page about comparative advantage yet?

In his 1817 book, Prinicples of Political Economy and Taxation, the English economist David Ricardo proved that even when one country has an absolute advantage—that is, the ability to produce everything more efficiently than its trading partner—there are still gains to be had from trade. The way it works is through specialization. Regardless of the size of their economy, countries increase their overall welfare by specializing in goods that can be produced with greater relative efficiency than their trading partner. So even if the United States can out-produce Mexico in both children's toys and computer chips, there is an economic basis for devoting resources to the production of one at the expense of the other.

Even when this sinks in, notes Krugman, it can be a bitter pill to swallow. "At the shallowest level, some intellectuals reject comparative advantage simply out of a desire to be intellectually fashionable. Free trade, they are aware, has some sort of iconic status among economists; so, in a culture that always prizes the avant-garde, attacking that icon is seen as a way to seem daring and unconventional," he writes. "At a deeper level, comparative advantage is a harder concept than it seems, because like any scientific concept it is actually part of a dense web of linked ideas."

When challenged by the Polish mathematician Stanislaw Ulam to name an economic theory that was at once both non-obvious and true, Nobel Prize–winner Paul Samuelson chose comparative advantage. "That it is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them," he replied.

Comparative advantage is counterintuitive. After all, if a country can produce more children's toys and more computer chips, why not forgo trade and live an uncomplicated life? Because, argues David Ricardo, it would be reducing the overall welfare of your citizens. Failure to specialize translates into a loss of efficiency for the economy as a whole. Resources are directed to the production of goods that could be more efficiently employed elsewhere. The net result? You could be better off.

So how does comparative advantage relate to immigration? In theory, trade and immigration should be interchangeable. Each in its own way alters the quantity and quality of an economy's labor force. And each expands a nation's consumption possibilities. In other words, all other factors being equal, a country that does not restrict trade or immigration will be better off than one that does.

To build on the earlier example, children's toys made outside the United States by relatively low-wage workers in Mexico can, thanks to comparative advantage, be sold inside the United States for a lower price than a domestically produced toy. On the other hand, the low-wage workers could immigrate and produce the same good within the United States for the same low price. Theoretically, there is very little difference between these two options. According to most economists, how and where the good is ultimately produced is a matter of policy preference.

To the extent that labor can be considered a commodity, it shouldn't matter where the good is produced. Comparative advantage, if applied to immigration, suggests that labor should be allowed to migrate where it can be most efficient. If the person doesn't migrate, goes the argument, then the job will.

Some advanced developing nations, such as India and the Philippines, have lobbied the industrial world to liberalize immigration policies, especially for people with skills. The high salaries that these workers can earn in the industrialized world are often sent back to the home country. According to World Bank figures, official remittances to India totaled $21.7 billion in 2005. The Philippines received $11.6 billion. But comparative advantage suggests that these high skilled workers ought to be able to derive benefits regardless of where they do their work. If an Indian Internet technology worker immigrates to Silicon Valley or telecommutes from Bangalore, the effect is the same.

Domestic politics, security concerns, and simple xenophobia all conspire against open-door immigration policies. In any event, when it comes to refining a nation's consumption possibilities, trade is often the more useful tool. Trade policy can be tinkered with as a nation's needs or tastes change. By contrast, it is difficult to send home low-skilled workers once they've been allowed in.

Remarking on the difficulty of deporting guest workers recruited to help rebuild Germany after World War II, author Max Frisch wrote, "Workers were called, and human beings came."

Read More: Economy, Globalization, Jobs, Migration, Trade, Global

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