Low-wage Labor and the Geography of Production: A Qualified Defense of the “Pauper Labor Argument”

Abstract

Does dismantling barriers to moving production offshore mean that jobs will actually flee to low-wage countries? The labor movement says yes, but many mainstream economists reject this “pauper labor argument,” insisting that wages are low only where productivity is low, and so low wages do not motivate firms to relocate. We argue that this mainstream view is wrong both empirically and theoretically. The available data strongly suggest that unit labor costs (ULCs) differ widely among countries, and ULCs appear on average to be lower in poor countries. We argue, further, that low wages are indeed an independent source of competitiveness, because firms often carry a significant portion of their productivity with them, allowing them to achieve ULCs in the host country below the existing average there. We also comment on Harrison and McMillan's (2006) paper on these issues, and sketch an alternative framework for analyzing relationships among wages, productivity, and the relocation of production.