As U.S. trade with low-wage countries like Mexico increases, will wages in the United States be...

As U.S. trade with low-wage countries like Mexico increases, will wages in the United States be pushed down? Why or why not? Are low-wage workers in the United States hurt when there is more trade with Mexico? Discuss.

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Expert Solution

When a country trades with a low wage country, such as US forming trade relations with Mexico we first analyze the cause behind unequal wages and usually it depends upon abundance of factors of production, in a country like Mexico where there are a lot of workers available to work, wages tend to fall and remain low while in a capital intensive country wages get high because there is less number of manual work and hence bargaining power tips towards workers.

So according to Heckscher Ohlin theory factor price equalization takes place, i.e. by trading all the capital intensive work shifts to US and all labor intensive work shifts to Mexico and this boost in demand pushes Capital price in US and Wages in Mexico up, hence indirectly wages decrease in US because relatively there is less demand for labor intensive work now. The opposite happen in Mexico, due to a lot of labor-intensive work- of both US and Mexico, wages increase.

This however does hurt low wageworkers in US, because when high wageworkers get unemployed a proportion of them become available for low wage jobs, or in other word over qualified people start to work for a wage level that was unacceptable for them before. Although some high wage earners tend to opt out of market as well giving adequate amount of opportunity to low wage workers but the offset amount is not high enough to reverse the negative impact on low wageworkers.

Rahul Sunny answered 1 year ago

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