Productivity And Labor Costs In Newly Industrializing Countries

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Federal Reserve Bank Of San Francisco Weekly Letter


The sweatshop labor argument "says that countries with low wages (or lax regulations) have an unfair competitive advantage, and its proponents advocate protection against imports from low- wage countries to save U.S. jobs. But the `sweatshop labor' argument fails to consider that low wages and weak regulations do not by themselves guarantee low costs. If they did, countries with rock-bottom labor costs...would rule world trade. Clearly, labor productivity matters, too. To the extent that low wages reflect low labor productivity, any advantage to employing low- wage labor is offset. A more appropriate approach would be to ask whether labor costs are low relative to productivity in developing countries.... [T]his WEEKLY LETTER presents new estimates of productivity and labor costs for five Pacific Basin Newly Industrializing Countries (NICs) relative to the U.S. for 1970 to 1990.... The data suggest that the `sweatshop labor' argument, and its variants, greatly exaggerate the competitive edge of low-wage countries."