Sunday, January 24, 2016

Thomas Sowell's Double Standard Regarding Mexican Workers and the 'Race to the Bottom' Argument

Stuart K. Hayashi


This is a re-post of a section a much longer post found here.


There is an argument against open immigration that doubles as an argument against free international trade.  First we hear that if we allow open immigration, that is bad because big companies will choose to hire Mexicans within U.S. borders; they will hire the Mexicans for low wages and leave native-born Americans without work.  Secondly, we hear that if we allow free international trade, that is bad because big companies will choose to hire Mexicans still in Mexico; they will hire the Mexicans for low wages and leave native-born Americans without work.  Both accusations stress that big companies will choose to hire Mexicans for low wages and leave native-born Americans without work; the only difference between the two allegations is that in one, the Mexicans are still in Mexico whereas, in the other, the Mexicans are in the USA.

Thomas Sowell shows a double standard here.  He says that in the case of free international trade, there is nothing to fear when it comes to the idea that big companies will hire Mexicans in Mexico for low wages.  In his book Basic Economics (see page 218 here), Sowell correctly states,

As for jobs, before the free-trade agreement was passed, there were dire predictions of a "giant sucking sound" as jobs would be sucked out of the United States to Mexico and other countries with lower wage rates after the free-trade agreement went into effect.  In reality, the number of [native-born] American jobs increased after the agreement and the unemployment rate in the United States fell over the next seven years from more than seven percent down to four percent, the lowest level seen in decades.  . . . What happens when a given country, in isolation, becomes more prosperous?  It tends to buy more because it has more to buy with.  And what happens when it buys more?  There are more jobs created for workers producing the additional goods and services.

That argument is correct.  But, bizarrely, Sowell seems not to notice that it is applicable when native-born Americans reduce their own costs by hiring Mexican immigrants (presently inside the USA!) for low wages.  He makes a frighteningly protectionist argument against allowing U.S. firms to hire Mexican immigrants for low wages:

How often have we heard that illegal immigrants "take jobs that Americans will not do"? What is missing in this argument is what is crucial in any economic argument: price.

Americans will not take many jobs at their current pay levels -- and those pay levels will not rise so long as poverty-stricken immigrants are willing to take those jobs.

If Mexican journalists were flooding into the United States and taking jobs as reporters and editors at half the pay being earned by American reporters and editors, maybe people in the media would understand why the argument about "taking jobs that Americans don't want" is such nonsense.

This is odd, because the same "cost savings" argument that Sowell used to defend the hiring of low-wage Mexicans in Mexico equally applies to the hiring of low-wage Mexicans in the USA.

First, let's observe how Sowell's own retort against hiring low-wage Mexicans in the USA can also be used against his defense of hiring low-wage Mexicans in Mexico.

How often have we heard that, thanks to the free-agreements that Sowell supports, Mexicans in Mexico and Indians in India "take jobs from Americans"?  What is missing from Sowell's argument is what is crucial in any economic argument: price.

Americans will not take many jobs at their current price levels -- and those pay levels will not rise as long as poverty-stricken Mexicans in Mexico are willing to take those jobs.

If U.S. firms were outsourcing information-technology jobs to Mexico and India, and those Mexicans and Indians were earning half the pay that would be expected by American information-technology workers, maybe economists would understand why it's nonsense to let U.S. firms outsource information-technology jobs abroad.

The same defense that Sowell provides to hiring low-wage Mexicans in Mexico applies to hiring low-wage Mexicans in the USA.

Sowell says this is the reason why it's OK if U.S. firms can hire Mexicans in Mexico for low wages, rather than giving those jobs to native-born Americans:  when those U.S. firms save money by hiring Mexicans in Mexico for low wages, they incur cost savings. It's not as if the U.S. firms will just sit on that money.  All money is spent in the long run:  either it is spent for immediate needs or it is saved for a future expenditure.  Those U.S. firms then use that cost savings to invest in new economic activities, or they spend it for immediate use.  Either form of expenditure produces demand for more goods and services.  The increase in demand for more goods and services sends a signal to would-be entrepreneurs that they will profit by supplying such goods and services.  These would-be entrepreneurs then hire native-born Americans.  True, when the USA and Mexico trade freely, this expands the market so that there is an increased supply of would-be employees.  But this is balanced out by a commensurate increase in demand for would-be employees.  That is why, everything else being equal, there is not an increase in unemployment.

Now observe how this argument applies to the labor market within U.S. borders.  When immigrants come to the USA and work for low wages, they increase the supply of available would-be employees.  However, these same immigrants must also consume goods and services.  Thus, the presence of these immigrants also increases consumer demand for goods and services.  And this increase in consumer demand signals to would-be entrepreneurs (native-born and immigrant alike) that they can profit by supplying such goods and services.  These would-be entrepreneurs then hire native-born Americans to assist them in that enterprise.

This is the reason why I say it's OK if U.S. firms can hire Mexicans in the USA for low wages, rather than giving those jobs to native-born Americans:  when those U.S. firms save money by hiring Mexicans in Mexico for low wages, they realize cost savings. It's not as if the U.S. firms will just sit on that money.

All money is spent in the long run:  either it is spent for immediate needs or it is saved for a future expenditure.  Those U.S. firms then use that cost savings to invest in new economic activities, or they spend it for immediate use.  Either form of expenditure produces demand for more goods and services.   The immigrant population earning the low wages also produce consumer demand for such goods and services. The increase in demand for more goods and services sends a signal to would-be entrepreneurs that they will profit by supplying such goods and services. These would-be entrepreneurs then hire native-born Americans.

True, when native-born Americans and illegal aliens trade freely, this expands the market so that there is an increased supply of would-be employees.  But this is balanced out by a commensurate increase in demand for would-be employees.  That is why, everything else being equal, there is not an increase in unemployment.

The same principle also applies to wages.  It explains why, when U.S. firms save money by hiring people for allegedly low wages, that does not necessarily bid down the average wage in the long run.