Harmful Trade Policies

In an article on the economic policies of the different candidates for the Democratic nomination in the New York Times today, one particularly harmful policy idea supported by Richard Gephardt is for an 'international minimum wage'. Although motivated by good intentions for increasing the standard of living of the poorest in the world, it would actually cause the people who were supposed to benefit harm. The mechanism by which this occurs is trade. In autarky (that is, with no trade), it might be possible to raise the minimum wage, thus helping the lowest paid workers, while not hurting economic growth. By raising the minimum wage, the lowest paid workers might then be more productive, either because they want to keep the higher paying job, or more likely in poor countries, because they are better nourished, being able to afford more food from their higher wages. However, in a world with trade and the opportunity this provides to produce in countries with lower factor costs, the idea for an 'international minimum wage' would do more harm than good because it would be followed by a large outflow of jobs from the countries where the minimum wage is binding. This would occur because presumably in countries where the minimum wage is not binding the workers' productivity is higher. Through this flow of jobs out of low-productivity, low-wage countries, the 'international minimum wage' would be detrimental to the lowest wage workers. While low wages are a problem, there are more effective and beneficial (to the poorest) ways to raise them. One such way is to lower trade barriers so more countries share in the benefits of trade by being profitable locations for production of goods for export. Export-led growth is the way almost every development success story of the past half century.

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