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• Preface
• Studies In the Theory of International Trade
• Chapter I: English Theories of Foreign Trade, Before Adam Smith: I
• I. Introduction
• II. “ Mercantilism” and “bullionism”
• III. the Balance-of-trade Doctrine
• IV. Reasons For Wanting More Bullion
• V. Employment and the Balance of Trade
• Chapter II: English Theories of Foreign Trade, Before Adam Smith: Ii
• I. Legislative Proposals of Mercantilists
• II. the Collapse of Mercantilist Doctrine
• III. Some Modern Interpretations of English Mercantilism
• Chapter III: The Bullionist Controversies: I. The Inflation Phase
• I. the Participants In the Controversy
• II. the Factual Background
• III. Premium On Bullion As Evidence of Excess Issue: the Bullionist Position
• IV. Qualifications Conceded By the Bullionists
• V. Possible Objections to the Bullionist Position
• VI. the Anti-bullionist Position
• VII. the Balance of Payments Argument
• VIII. the Possibility of Excess Issue By Banks
• IX. Responsibility For the Excess Issue: Bank of England Vs. Country Banks
• X. Responsibility For Excess Issue: the Credit Policy of the Bank of England
• Chapter IV: The Bullionist Controversies: II. The Deflation Phase
• I. the Resumption of Cash Payments
• II. Responsibility of Resumption For the Fall In Prices
• III. the Economic Effect of Changing Price Levels
• IV. Ricardo's Position On the Gold Standard
• V. Reform Without Departure From the Metallic Standard
• VI. Paper Standard Currencies
• Chapter V: English Currency Controversies, 1825–1865
• I. Introduction
• II. the “currency School” -“banking School” Controversy
• III. the “palmer Rule ”
• IV. the Bank Act of 1844
• V. the Possibility of Overissue of Convertible Bank Notes
• VI. the Role of Deposits, Bills of Exchange, and “credit” In the Currency System
• VII. the Technique of Credit Control
• VIII. the Relation Between Bank of England Operations and Specie Movements
• IX. Currency Reform Proposals
• Chapter VI: The International Mechanism Under a Simple Specie Currency
• I. Introductory
• II. the Mechanism According to Hume
• III. an Omitted Factor? Relative Changes In Demand As an Equilibrating Force
• IV. Prices In the Mechanism: the Concept of “price Levels ”
• V. the “terms-of-trade” Concept
• VI. the Prices of “domestic” Commodities
• VII. the Mechanism of Transfer of Unilateral Payments In Some Recent Literature
• VIII. a Graphical Examination of Pigou's Analysis 1
• IX. Some Elaborations On the Basis of Pigou's Analysis
• X. an Alternative Solution
• XI. Types of Disturbance In International Equilibrium
• XII. Specie Movements and Velocity of Money
• XIII. Commodity Flows and Relative Price Levels
• XIV. Exchange Rates
• XV. A Criticism of the Purchasing-power Parity Theory 1
• Chapter VII: The International Mechanism In Relation to Modern Banking Processes
• I. Automatic Vs. Managed Currencies
• II. Primary and Secondary Expansion of Means of Payments
• III. Short-term Loans In the International Mechanism
• IV. Primary and Secondary Expansion In Canada , 1900–13
• V. the International Mechanism and Business Cycles
• Chapter VIII: Gains From Trade: the Doctrine of Comparative Costs
• I. the Nature and Origin of the Doctrine
• II. the Division of the Gain From Trade
• III. Trade In More Than Two Commodities
• IV. Trade Between More Than Two Countries
• V. Transportation Costs
• VI. Increasing and Decreasing Costs
• VII. Prices, Money Costs, and Real Costs
• VIII. Dependence of Comparative Cost Doctrine On a Real-cost Theory of Value
• IX. Differences In Wage Rates In Different Occupations
• X. Variable Proportions of the Factors and International Specialization
• XI. Variable Proportions of the Factor and Comparative Real Costs
• XII. “ Opportunity Cost” Analysis As a Substitute For Real Cost Analysis
• Chapter IX: Gains From Trade: the Maximization of Real Income
• I. “ Mass of Commodities” and “sum of Enjoyments”: Ricardo and Malthus
• II. Reciprocal Demand and the Terms of Trade
• III. Terms of Trade and the Amount of Gain From Trade
• IV. “ Net Benefit” In International Trade: Marshall
• V. Total Net Utility Derived From International Trade: Edgeworth
• VI. the Gain From Trade Measured In Money
• Appendix: a Note On the Scope and Method of the Theory of International Trade

IX. Differences in Wage Rates in Different Occupations

If different wages are paid to different kinds of labor and these different kinds of labor are used in different proportions by different industries, or if the same kind of labor is paid different wages in different industries, then, assuming labor to be the only factor of production, prices of commodities produced within a country, though proportional to wages costs, will not be proportional to labor-time costs. It will follow that the course of trade under free trade will be governed by wages costs (i.e., labor-quantity costs times wage rates) and not, as posited by Ricardo, by comparative labor-quantity costs. This was seen and clearly stated by Longfield:

The next circumstance which gives a direction to the stream of commerce, is, that the relative wages of labor in one country may vary by a different law from that which is observed in another. In one country, honesty and skill may be rare and high-priced qualities, and add much to the relative wages of the laborer who is required to possess them. In another country, the general comfortable condition of the people may render the laborer most unwilling to encounter severe toil, and a great increase of price may be necessary to induce him to engage in a disagreeable or unhealthy occupation. In this latter country, honesty, and that attentive disposition which quickly produces skill, may be the general qualifications of the people. On this supposition, if no disturbing causes exist, manufactures which require honesty and skill, will exist in the latter country; as the laborers possessing those qualities will sell their labor cheaper in proportion to its productiveness. In these two circumstances all commerce may be said to originate—namely, a difference in the proportion of the productiveness of labor of different kinds, in different countries; and the different scales by which the relative wages of labor vary in different countries.1

But when Longfield proceeded to deal with the advantages to be gained from free trade, he tacitly assumed that a country with an absolute advantage in money costs in the production of a particular commodity would also have a comparative advantage in real costs with respect to that commodity, and made no further mention of the complication which he had previously introduced.2

Cairnes pointed out that international trade is proximately regulated by prices and not by comparative real costs, and that the prices of commodities produced within a country by different noncompeting groups will not be proportional to real costs in terms either of quantities of labor expended thereon or of “labor sacrifice.” 3 But Cairnes apparently did not see the problem which this created for the free-trade doctrine, or else deliberately abstracted from it, for later he states that “it has been seen that nations only trade with one another when by doing so they can satisfy their desires at smaller sacrifice or cost than by direct production of the commodities which minister to them,” 4 whereas all that he had shown was that they trade with one another when the imported commodities can thereby be obtained at a saving in money costs. In his discussion of the tariff issue he tacitly makes the assumption, against which he had objected as illegitimate when dealing with general value theory and with the theory of international trade, that wages costs throughout the range of a nation's industries are an adequately accurate measure of relative real costs.5 Thus even the economist most responsible for directing attention to the significance of differences in wages in different occupations ignored these differences when dealing with the tariff problem.

The problem does not appear to have received any further attention until we come to Professor Taussig's treatment. Taussig presents a clear and unambiguous demonstration, with the aid of arithmetical illustrations, of how differences in wages in different occupations may cause relative prices to diverge from relative labor-quantity costs, and how in consequence international specialization under free trade may not conform with comparative advantage in terms of labor-time costs.6

Taussig, however, claims that there is at least a rough correspondence between the hierarchy of occupations in advanced countries,7 and that the exceptions, though important, are essentially temporary in character. He concedes that differences between countries in this hierarchy will operate to make the course of trade diverge from what it would be if prices were regulated by labor-time costs, and gives some concrete examples of such divergence. He maintains, however, that if the hierarchies are identical in different countries, “trade will develop as it would if prices within each country were governed by labor costs alone.” I believe that Taussig has shown that the greater the approach to similarity in different countries in the hierarchy of wages the smaller will be the deviation of trade from the course it would follow if wages within each country were uniform, but that he has failed to show that with complete similarity in the hierarchies there would be no deviation from the course trade would follow if wages within each country were uniform in all occupations.

Taussig presents his reasoning with the aid of a series of arithmetical illustrations based on two somewhat different types of assumptions with respect to the nature of the non-competing groups. He illustrates the first type by the following example:8

In this illustration there are differences in wages as between the different industries, but the order and percentage degree of difference are identical in the two countries. Taussig concludes that the course of trade will be precisely the same as if supply prices within each country were regulated by labor-time costs. Ohlin has pointed out, however, that while the commodities exported and imported by each country remain the same the terms of trade may be different in the two cases. With labor-time costs regulating, i.e., with wages the same in both occupations, trade can take place anywhere within the limits of 1 wheat for 1 linen and 1 wheat for 1.5 linen. With the differences in wages in the two industries trade can take place only within the limits of 1 wheat for ⅔ linen and 1 wheat for 1 linen, a change to the disadvantage of the country with a comparative advantage in the product of the low-wage industry.9 But Taussig has shown that the deviation from trade in accordance with comparative labor-time costs will tend to be less when the direction and degree of difference in wages in the two industries are the same in the two countries than when they are not the same.

In his second type of illustration, Taussig deals with differences in wages of different classes of labor, each of which finds employment throughout the range of industry. He then shows, successfully as far as I can see, that if the hierarchy is the same in different countries both as to rank and as to percentage differences in wages, and if all industries in both of the countries use labor coming in the same proportions from the different social classes of labor, the course of trade, although then as always immediately regulated by prices and money costs, will be precisely the same as if it were governed by labor-quantity costs.10 The assumptions on which this conclusion rests seems to me, however, seriously to restrict its significance, especially as departure from any one of them would force a modification of the conclusion. But Taussig's analysis turns rather on the existence of fixed scales of relative wages than on the question of occupational mobility of labor,11 and it seems to me that more fruitful results can be obtained by the application to the problem of Taussing's general mode of analysis of the origin and significance of differences in wages.12

First, differences of wages in different occupations may be what Taussig has called “equalizing” differences, i.e., may be wholly due to and proportional to differences in the attractiveness, or irksomeness, of the occupations, and not to the absence of complete mobility between the occupations. Specialization in accordance with money costs will then also be in accordance with comparative real costs measured in terms of “disutilities” or of irksomeness of the occupations or of the living conditions associated with such occupations, even though it is not in accordance with comparative labor-time costs. In such cases the doctrine of comparative real costs holds unequivocally, in spite of the differences in wage rates in different occupations.13

Next, let us suppose that the differences in wages are due to absolute labor monopolies in the high-wage groups, and that the hierarchy of labor is according to industry or product, rather than, or more than, across industry in general.14 Given the absence of the possibility of movement of labor from the low-wage to the high-wage industry, then the amount of labor available for the latter industry has only the limited degree of variability resulting from the dependence of the amount of labor offered for employment by the members of the high-wage group on the wage obtainable. Abstracting from such variability of the amount of labor as is internal to the group and not due to migration of labor from other groups, if the high-wage industry is at a comparative advantage in terms of real costs but, because of the limitations on the number of laborers who have access to employment in that industry, competing products continue to be imported, the imposition of a tariff on its product will not appreciably affect the volume of its domestic production, and its significant results will be confined to changes in the volume of foreign trade, the relative prices of commodities, and the relative wages paid in different industries. The inequality in wages would be further accentuated, and the power of the monopoly labor group to exploit the rest of the community would be increased, but there would be no improvement in the apportionment of labor among the different occupations.

Finally, suppose that there is complete mobility between occupations, but that by law, custom, or trade-union regulation wages in some of the industries which are in a position of comparative advantage in terms of real costs are maintained at so high a level that the domestic market for their products is shared with imports of competing products. Under these conditions a protective duty on imports of the commodities produced by the high-wage industries would increase the amount of employment provided by those industries and would result in a shift of labor from occupations of lower to occupations of higher productivity. The conditions of this hypothesis would not be consistent with long-run assumptions, but recent experience has shown that wages in some occupations can persist for long periods at levels high enough seriously to restrict the volume of employment, even when the only alternatives for those not securing employment therein are either unemployment or the acceptance of much lower wages in other occupations.

These examples do not exhaust all the possibilities, but they bring out sufficiently the range of possibilities that the existence of different rates of wages in different occupations will make import duties profitable. The results of this analysis may be recapitulated in the following propositions:

• (1)Equalizing differences in wages do not cause trade to diverge from the lines of comparative advantage in terms of real or subjective costs, even if they do cause trade to diverge from the lines of comparative advantage in terms of labor-time costs.
• (2)Where differences in wages are due to a labor monopoly in the high-wage occupation, import duties on the product of the high-wage industry will not result in a transfer to that industry of labor from low-wage industry, will not therefore improve the situation from the point of view of production, and will impair it further from the point of view of distribution if inequality is regarded as an evil.
• (3)Where there is occupational mobility but wages are fixed by regulation or custom at too high a level in some industry with a comparative advantage in terms of real costs, an import duty on the product of that industry will enable it to employ more labor. But free trade plus flexibility of wages will result in an even closer approach to the presumptively optimum distribution of labor among the different occupations.

The doctrine of comparative costs emerges, therefore, very nearly intact even from a test about whose results some of its most ardent adherents have had misgivings. Although reached by a somewhat different method, the foregoing results amply confirm the conclusion of Professor Taussig that the existence of differences in wages does not suffice to overturn the doctrine of comparative costs.15

[1]Three lectures on commerce, 1835, pp. 56-57. Ohlin (Interregional and international trade, 1933, p. 32) cites a similar passage from Longfield's earlier Lectures on political economy, 1834, pp. 240-41, and asks the reader to note “that Longfield does not think of cheapness relative to effectiveness, as did the classical economists.” The passage I have cited shows that Longfield, to his credit, did think of cheapness relative to effectiveness (“cheaper in proportion to its productiveness”).

[2]Three lectures on commerce, pp. 60 ff. Cf. for a similar procedure, J. S. Eisdell (Treatise on the industry of nations, 1839, I, 343) who acknowledges his indebtedness to Longfield.

[3]Some leading principles of political economy, 1874, pp. 322-24.

[4]Ibid., p. 375.

[5]Ibid., pp. 375-406.

[6]International trade, 1927; pp. 43-60. Cf. also for a similar, though less complete, treatment, his earlier “Wages and prices in relation to international trade,” Quarterly journal of economics, XX (1906), 497 ff. (reprinted in his Free trade, the tariff and reciprocity, 1920, pp. 89-94), and his Principles of economics, 1911, I, 485-86; II, 154-57.

[7]Unless the hierarchy was in each country relatively stable through time (as both Adam Smith and Ricardo believed it to be) or changed substantially only in response to world-wide forces, this would not be true. That it is substantially true in fact seems to have been the conclusion of C. F. Bickerdike from a detailed study of the wage statistics of several countries (“International comparisons of labor conditions,” Transactions of the Manchester Statistical Society, 1911-12, pp. 62-63).

[8]International trade, 1927, p. 47.

[9]B. Ohlin, “Protection and non-competing groups,” Weltwirtschaftliches Archiv, XXXIII (1931, I), 42-43.

If there were more than two commodities as potential articles of trade, even the commodities imported and exported by each country would not necessarily be wholly the same in the two cases.

[10]See especially the arithmetical illustration in Taussig, International trade, p. 51.

[11]If immobility of labor were tacitly assumed in his illustrations, then the specialization posited therein would be impossible.

[12]Cf. Taussig, Principles of economics, 1911, II, chap. 47. The analysis which follows is indebted to the article by Ohlin just cited, though there is some difference in conclusions. It is in part a restatement of the argument in my review of Manoilesco, The theory of protection and international trade, 1931, in the Journal of political economy, XL (1932), 121-25. Manoilesco had shown that if under free trade money incomes of workers were higher in manufacturing than in agriculture, and if manufactured products were imported and agricultural products exported, protection to manufactures would enable the country to get its manufactured products at lower labor-time costs by domestic production than by import.

[13]In my review of Manoilesco's book, in which he argued that the higher money earnings of labor in manufacturing than in agriculture justified protection for manufacturing industries which under free trade could not survive, I had contended, along the same lines as above, that if a greater labor-time cost of obtaining manufactured products by import in exchange for exports of agricultural products instead of by domestic manufacture was more than offset by the greater disutility of labor in manufacturing than in agriculture there would be no case for an import duty on the manufactured product. In a reply to this objection, Manoilesco merely repeats his demonstration that protection may result in a saving in labor-time costs, and overlooks, or perhaps denies, the necessity of weighting the labor-time costs by what Pareto called their “ophelimity coefficients” in order to get the real costs. (Mihail Manoilesco, “Arbeitsproduktivität und Aussenhandel,” Weltuirtschaftliches Archiv, XLII (1935, I), 41-43.)

[14]Haberler has commented that it is noteworthy that I do not mention the important case of “differences in the quality of the labor supplied by the different groups.” He comments that: “It falls outside the scope of the real-cost theory, to which Viner adheres—apparently from reverence for tradition; or at least it can be included only under quite definite assumptions.” (Theory of international trade, 1936, p. 196, note 2.) There is no such omission, since “labor monopolies” would cover both those contrived and those due to scarcity of persons having the requisite qualities, and for the purpose in hand all that is relevant is the existence of monopoly, whatever be its cause.

[15]International trade, p. 61.