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The Human Impact of Factor Mobility

Mises Daily: Monday, June 07, 2004 by


That some factors of production are mobile, says the new protectionist, "proves" that free trade is not as attractive as (supposedly) David Ricardo argued. But factor mobility is not new. It has long been accepted by economists that either goods or people (and other factors of production) move. Indeed, part of the argument for free trade between Mexico and the US is that there would be a reduced problem of illegal immigration.

Economics predicts that, subject to the costs involved, resources as well as goods will flow from where they are in relative abundance to where they are in relative scarcity. This means that people will tend to flow ("migrate") from poor countries to rich, and capital will tend to flow from rich countries to poor, all in addition to goods flowing based on comparative advantage.

As more and more countries establish the rule of law, giving foreign investors some confidence that they will enjoy their profits, if profits are realized from the risks they undertake in these countries, capital will flow from rich to poor countries. And, while there are countervailing considerations resulting in some reverse capital flow, in net, the direction of capital flow is from rich to poor countries.

If there were no costs involved, there would be an inexorable tendency for the returns both to capital and to labor to equalize on a global basis. Capitalists in rich countries would certainly benefit from being able to put their money into the most profitable investments. Workers in poor countries would certainly benefit from increased capital-to-labor ratios, increasing their productivity, wages and standards of living.

But, for workers in rich countries and for capitalists in poor countries there are offsetting considerations. Regarding workers in rich countries, they are benefited from increased total factor productivity but they are hurt by decreased capital-to-labor ratios in their countries. The converse is true for capitalists in poor countries. They too benefit from increased total factor productivity but they are hurt by increased capital-to-labor ratios in their countries.

While the general welfare is definitely improved for all, and especially for the poor among us, it may be in the narrow, or "special interests" of workers in rich countries (and capitalists in poor countries) to oppose free trade.

As Ludwig von Mises, the foremost advocate of free trade of the twentieth century, said:

"If we assume there are no institutional barriers preventing or penalizing the transfer of capital goods, workers, and commodities from one place or area to another and that workers are indifferent with regard to their dwelling and working places, there prevails a tendency toward a distribution of population over the earth’s surface in accordance with the physical distribution of the primary natural factors of production and the immobilization of inconvertible factors of productions effected in the past. There is, if we disregard the cost component, a tendency toward an equalization of wage rates for the same type of work all over the earth."

The only thing different today from what Mises said is that, today, it is increasingly feasible to outsource work. Therefore, workers do not have to distribute themselves over the earth’s surface in the manner described by Mises. Rather, work can be sent to them via the internet (and via other innovations in communication and transportation technologies).

Economics does not predict that free trade is an unalloyed blessing to all people in the countries involved. Focusing on rich countries, when comparative advantage is driven by different capital-to-labor ratios, economics predicts that free trade will benefit capital and hurt labor. With regard to types of labor, for example, skilled labor relative to unskilled labor, we could say that free trade tends to benefit skilled labor (as skilled labor imbeds capital) and to hurt unskilled labor. However, this tendency may not apply to all kinds of skilled and unskilled labor in any given short run. Economics also predicts that, in net, free trade will benefit rich countries, so that the winners in the rich countries will be able to compensate losers.

To be sure, compensation of losers is a tricky thing. First of all, minimizing the loss to losers must involve the shifting of labor from the shrinking to the expanding sectors in the economy. This will not happen if jobs are protected. Currently, the government attempts to compensate losers with job retraining programs and with grants to disproportionately-impacted communities.

Even those who back these programs must admit that they don’t work very well. These programs are, at best, political sops to a few Congressmen who might not otherwise support free trade. They hardly compensate those who lose their jobs to free trade. Mostly, they make jobs for government bureaucrats. As Shakespeare once put it, "‘tis kind to be cruel." The best policy is to make it clear that each of us has to adapt himself to changing circumstances and not wait around, unemployed, hoping that the government will revive the past.

Notice that the gains from free trade presume the shifting of resources from shrinking to expanding sectors. This is always a difficult proposition, and is particularly difficult when the economy is in recession. In normal years, the unemployment rate at any given time is about 5 percent, and about 20 percent of workers leave their old jobs (in many cases voluntarily), and find new jobs. In other words, the ratio of people unemployed at any one time to total changeover in the course of a year is about four to one. Another way of expressing the same phenomenon is that for every one net new job, there are about five new jobs created and about four old jobs lost.

Our increasing wages and standard of living result not from working longer hours or working harder. Rather, they result from a combination of increasing labor productivity and increasing total factor productivity which, in turn, depend on increasing saving and investment, from innovations and inventions, and from increasing specialization.

This means that our increasing standards of living depend on policies conducive to the accumulation of capital, to risk-taking, and to free trade. Our interest in increasing wages and standards of living are such that we accept that each of us must continuously maintain our edge in a very competitive global economy which means, among other things, that many of us will have to change jobs on a periodic basis.

But, this process of change does not work so well during recessions. And, the people most hurt are those who are unskilled, who lose their jobs involuntarily, and who have the most difficulty finding new employment. While the unemployment rate today is not very high from an historical perspective, and has even been falling during the past few months, the rate of long-term unemployment has continued to go up.

During the past year, four of my friends have had to deal with some really tough job situations. Two have landed on their feet. A third has secured an extension of a temporary job, but is still looking for a permanent job. And the fourth found a job that proved not to last very long and is now again out of work. When economics predicts there will be losers as well as winners from free trade, I know what this means. I can visualize the meaning of the economic statistics with which I work.

I would like to speak to the two examples commonly cited of workers negatively impacted by free trade. The first is computer programmers, who complain that their jobs are being outsourced. Their salaries soared during the dot com boom, and many people were drawn to this as a profession, but now they are struggling to compete. But protectionism is no solution to the worldwide glut of programmers.

If we were to restrict American companies to only hire American programmers, in order to protect American programmers’ jobs, the obvious response of the rest of the world would be to forbid American companies from selling their software and related products and services to their consumers. We would suffer a collapse of exports, and we would wind up "protecting" only a diminished number of jobs for American programmers.

And, isn’t it demeaning to programmers to say that they need government protection? Programmers are smart, have math and science-type skills, and are very well able to choose either to stay in the industry they are in, and ride out this period of over-supply, or else to shift to another sector of the economy.

The other example commonly cited of jobs being outsourced is radiological technicians. Cheaper technicians overseas are said to be able to read Cat scans and MRIs. Well, I am not a doctor of medicine, but when—two years ago—my daughter had a Cat scan to investigate the cause of her continued dizziness following a fall, I was as able as any medical professional to see the tumor in her brain. At that time, I didn’t care one wit about the nationality of the medical professionals who were to attend to her. I was just so happy that I was able to choose the best.

The same medical team at the University of Virginia Medical Center that operated on Christopher Reeve operated on my daughter. While there, I looked at the line-up of physicians and technicians they had on staff in their neurosurgery unit. The people looked as though they had been brought together from all over the world. I trusted that the only criterion for their selection was that they were the best.

In addition to our educational program in computers, we have a number of educational programs in the health professions at the university at which I work. I therefore happen to know that there are times of "boom and bust" in specific health professions. Job offers and enrollments that were strong in certain fields a few years ago are now a bit soft. Today’s hot specialties might not be tomorrow’s. The ups and downs sometimes make things tough for our graduates. But, aligning supply with demand for the many thousands of jobs out of which a modern economy is comprised isn’t easy to do, and—almost all of the time—we are able to deal with the problem of misalignment.

It is a relatively easy job to advocate the cause of liberty during good times. But, during tough times, populist nostrums gain favor. We must always remember to think of these issues from the point of view of the consumers, which is to say, the whole of society, not just one small slice of it. I should mention that all is fine with my daughter.


Clifford F. Thies is the Eldon R. Lindsay Professor of Economics and Finance at Shenandoah University (cthies@su.edu). This article appears in the May 2004 issue of the Free Market. Comment on the Blog.