Wages here are determined by wages in the rest of the economy

Now it’s entirely true that we don’t have to take as gospel everything that Paul Krugman says in his New York Times column. He is, when writing there, working as a rhetorician for a certain set of political ideas, ideas which – to put it mildly – not all of us agree with. However, Krugman the trade economist is someone we must, at the very least, take very seriously. That’s not to say that he’s absolutely and entirely right upon everything for no human ever is even within their own subject of expertise.

It’s also true that, at least as far as I’ve seen, Krugman hasn’t derided this latest Nafta renegotiation demand as ridiculous. But we can still derive that result from his writings. Because what Trump and Navarro are demanding, presumably with Trump’s backing, is that Mexican auto worker wages would have to be as high as American ones in order for tariff free access to continue. Which is just to entirely misunderstand how wages work within an economy.

But it is the demand being made:

The U.S. is seeking to complete its overhaul of the North American Free Trade Agreement with new rules that would penalize the Mexican auto industry—unless it boosts wages to about $16 an hour.

President Donald Trump’s administration is winning some support from Detroit auto makers for its Nafta proposals by including terms that would favor U.S.-based manufacturers over Asian and European rivals that produce cars in the U.S.

Support from Detroit might help the administration reach its goal of concluding a Nafta deal by mid-May, which could allow it to push the pact through Congress by year’s end.

Under Nafta, U.S. manufacturers have produced cars and parts in Mexico, where wages are lower, but Mr. Trump’s administration is now seeking to force Mexican factories to pay more for labor—or send auto jobs back to the U.S. or Canada.

Robert Lighthizer, the U.S. trade representative and lead negotiator for the administration, is reworking Nafta to require that 40% of the content of any car that trades duty free within the North American bloc must come from workers who earn above a particular wage level, according to industry officials familiar with the trade negotiations.

It’s just nonsense.

Mexican workers’ wages are at the heart of a major proposal from the United States aimed at breaking through an impasse on automobiles and securing a new North American Free Trade Agreement.

The latest U.S. idea incorporates worker salaries into the formula for calculating which cars can avoid tariffs under the auto rules of origin, several sources in different countries said.

It doesn’t even work on its own terms. Cars made with expensive labour will be expensive. So the American producers don’t need to be protected, by tariffs, against cars made with expensive labour. Which is exactly what the concession is, that if expensive labour is used then the American producers won’t be protected.

Hmm, not really worth having, is it?

There’s also the point that American consumers get shafted either way. Either they pay tariffs upon cheaper cars, or not on more expensive, but either way they must pay more for their cars.

But we’ve also a deeper problem. Wages aren’t set by sector in an economy, not in this manner. Wages are set by the average productivity in an economy, as Paul Krugman has famously pointed out:

– Wages are determined in a national labor market: The basic Ricardian model envisages a single factor, labor, which can move freely between industries. When one tries to talk about trade with laymen, however, one at least sometimes realizes that they do not think about things that way at all. They think about steelworkers, textile workers, and so on; there is no such thing as a national labor market. It does not occur to them that the wages earned in one industry are largely determined by the wages similar workers are earning in other industries. This has several consequences. First, unless it is carefully explained, the standard demonstration of the gains from trade in a Ricardian model — workers can earn more by moving into the industries in which you have a comparative advantage — simply fails to register with lay intellectuals. Their picture is of aircraft workers gaining and textile workers losing, and the idea that it is useful even for the sake of argument to imagine that workers can move from one industry to the other is foreign to them. Second, the link between productivity and wages is thoroughly misunderstood. Non-economists typically think that wages should reflect productivity at the level of the individual company. So if Xerox manages to increase its productivity 20 percent, it should raise the wages it pays by the same amount; if overall manufacturing productivity has risen 30 percent, the real wages of manufacturing workers should have risen 30 percent, even if service productivity has been stagnant; if this doesn’t happen, it is a sign that something has gone wrong. In other words, my criticism of Michael Lind would baffle many non-economists.

Associated with this problem is the misunderstanding of what international trade should do to wage rates. It is a fact that some Bangladeshi apparel factories manage to achieve labor productivity close to half those of comparable installations in the United States, although overall Bangladeshi manufacturing productivity is probably only about 5 percent of the US level. Non-economists find it extremely disturbing and puzzling that wages in those productive factories are only 10 percent of US standards.

The basic demand, Mexican wages in a certain type of factory must be different from Mexican wages more generally just doesn’t work. Because that’s just not how wages are indeed determined.

But then there are some of us who have been saying for some time now that having Lighthizer and Navarro anywhere near US trade policy was going to be a very bad idea indeed, haven’t there?

Support Continental Telegraph Donate


  1. Krugman is right that no one is born with “autoworker” tattooed onto him. A $16 Mexican autoworker wage would induce Mexicans from other industries (where they are paid only what they are worth) to queue up at the Ford plant to perform comparable functions for five times the pay. It would also ruin the competitive advantage that Mexico enjoys from the free-trade treaty. Maybe someday Krugman will consider how his other policy recommendations would alter personal choices, leading to unintended side-effects.

    Larry Kudlow may be able to convince the President that Mexico shipping cars to the US is not an act of war. But he will not be able to overcome carmakers using “free trade” as a cover to solidify their own rackets.

    I mentioned Lighthizer’s absurd demand on May 1: http://www.continentaltelegraph.com/business/just-call-it-free-trade/

  2. It is quite stupefying the number of people who think that Trump is deaf. They keep on repeating over and over for the zillionth time that trade protection is bad policy. Donald heard you a long time ago. He understands your arguments probably better than you do. Protectionism has got absolutely sweet fanny adams to do with economics, logic and the historical record. It has everything to do with politics. There is only one possible way to change Trump’s stance on protectionism and that is to change his constituency’s attitude to protectionism. So sit back and think for ten minutes how you would do that. If you think that articles like this would fit the purpose, my advice is never try writing advertising copy.

    • While I’d agree that substantial parts of Trump’s constituency likely favor protectionism, at the present time with unemployment low and blue collar workers having the best employment prospects they’ve had in years, I didn’t see that there wasn’t that much much agitation for tariffs, etc. No, this Trump thinking that like any ardent liberal he can micromanage the economy better than any invisible hand – playing little tin god because he can.

      • You are neglecting the possibility that Trump announced tariffs not because he wants there to be tariffs. Especially with Kudlow on board, what Trump wants is to light a fire under foreign leaders and exact a pro-America price for exempting them from the tariffs. Unfortunately, there has been and will continue to be micromanagement; for instance, in yesterday’s talks with the automakers, there was no hint that anyone wants to simply discard the miles-per-gallon mandate or the ethanol mandate and let the customers decide.

        • You’re assuming a subtlety of thinking that I rather doubt is there. Things went along swimmingly during his first year when he simply lessened the government’s boot on peoples’ necks. Now that he wants to micromanage I’m less hopeful. Trump is not to my taste. One of those people who careen through life leaving messes in their wake. Like many conservatives, I was inclined to think that we should just grin and bear it so long as some good things came out of it, but I’m skeptical that much good will continue – though another Supreme Court appointment would forgive a lot of sins.

          If we ever want to lessen illegal migration from Mexico, there would nothing like Mexico becoming a wealthier country to accomplish that. This ain’t helping.

    • Quite right, one does not get to be President by being the best economist but by being the best politician. Protectionism, the Wall That Mexico Is Going To Pay For, etc., I usually accept silently as the cost for broadening the Trump coalition to more than just me (for which Gorsuch on the Supreme Court and Pruitt at the EPA were my payment in full and Pompeo/Kudlow/Bolton are bonus dividends). All I claim is that promising the autoworker to protect his “job” at his desk forever, at the expense of unspecified future innovation, is lousy economics. After all, innovation, not Mexicans, is the “problem.” And the autoworker reads neither Krugman nor the Continental Telegraph.

  3. The idea that labor is a single factor, where individuals can move freely between industries. Is the misunderstanding. And to suggest that “laymen” some how lack the ability to understand this misunderstanding is patronizing of the highest order.

    Steelworkers, textile workers or any other type of proletariat are not an interchangeable entity that can be freely switched around without consequence.

    The concept of value applies to employees. A steelworker with 20 years experience has greater value than a textile worker. No (sane) employer will offer a textile worker (20 years experience in the textile industry) the same wage as a steelworker with 20 years experience in the steel industry.

    So the idea a worker can “simply” switch industry is fatally flawed. By default, a worker with relevant training and experience has more value and therefore commands a better wage than one without. And “laymen” are well equipped to understand this economic reality.

    This is not simply an opinion. There are many examples of companies out-sourcing in-house functions, only to find the expect cost saving fail to arrive simply because the new workers lack the experience and training need to perform the job efficiently and effectively.

    • The idea that labour is entirely homogoneous is, as you say, incorrect. But the idea that it is not homogenous at all is wrong, and more so.

      Otherwise, we’d have real difficulty describing why a barber in Caracas gets less per haircut than one in Chicago.

    • Hal, of course value applies to labor, and of course different workers do a job at greater or lesser value. A worker who moves to a different industry is initially worth less than a veteran, as he lacks experience of that job and knowledge of his co-workers. But Lighthizer’s proposal is to triple (relative to current auto wages) or sextuple (relative to parts vendors) the pay as a condition for their product to have free trade within the three-nation bloc. It is eminently “sane” to believe that the proposal would either wreck Mexican carmaking or vacuum workers up from the rest of the country.

      “This is not simply an opinion.” Of course it is! even if backed by anecdotes. As a counter-anecdote, in states with teacher shortages, those willing to temporarily waive the lobotomy of a teaching certificate found that teachers were coming out of the woodwork. Given competitive pay, many engineers made pretty good teachers.

      It is not patronizing at all to suggest that autoworkers think more about the threat to their current jobs than whether labor is or is not fungible.

  4. What’s the labour content of a car (at the production line, not the parts from elsewhere)? How much does it vary between cat types and manufacturers? What I’m getting at is, to what extent does that factor matter among all the others?

    • Lighthizer is not insisting on this provision because labor is a key cost in assembling a car, but because this provision would exclude Mexico from NAFTA, which suits Ford fine. The irony is that the U.S. would have plenty of manufacturing jobs if it had just repealed Obama-care as promised, and would ensure that the Wage And Hour Division had its phones and Internet stop working. The imminent Supreme Court decision making union membership more voluntary may also invigorate the shop floor. Puzder at Labor would have been a boon, hence the phony domestic scandal.

      Ford management is talking about drastically shortening the time-to-production of new products. Tesla aims to make a huge step to robot-produced cars. Everyone is looking at 3D printing, including metal parts it would be impossible to either stamp or mill as a single piece.