Wages, Productivity, and Trade

An iron law of labor economics is that wages are tied to productivity. Something for China trade hawks to ponder:

First, an irresistibly competitive China is a figment of the fevered imagination, since the real cost of labour will tend to remain in line with productivity.
-Martin Wolf, Why Globalization Works, p. 183.

This is why, as Chinese workers become more productive and thus higher-paid, labor-intensive industries such as textiles and basic assembly are leaving China for even lower-wage countries such as Indonesia and Bangladesh. The real key to prosperity is a mix of liberal economic institutions which enable high productivity (classically liberal, not left-liberal), and cultural institutions that value peace and prosperity. If China’s slow and stuttering cultural and economic liberalization continues, not only will it cease to be a security threat or an intellectual property thief, its people will become rich. And they will do so by enriching others through mutual exchange.


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