Wood (“Give Heckscher and Ohlin a Chance!” Review of World Economics, V. 130, No. 1, 20-49) argues that since capital is internationally mobile, capital cannot be the basis for comparative advantage. It is skills, or knowledge –embodied in humans – that determines the pattern of international trade. In a very neo-classical manner, Wood observes that capital intensity is a positive function of the wage. Thus, countries with more high-skill workers have higher labour-costs (wages) and should be those with relatively greater capital intensity.
From a Neo-Ricardian perspective, Yoshinori Shiozawa (A new framework for analyzing technological change Journal of Evolutionary Economics (2020) 30:989–1034) reverses the conclusion. For him, it is the technological progress that makes the economy more productive and affluent. But in previous work, he gives a central role to the production cost (labour) in explaining the rise of developing countries as main players in global supply chains.
My question: in practice, international differences in wages are not only the result/cause of productivity and capital intensity as mentioned above, but also result from differences in cost-of-living (a Post-Marxian would say: the cost of labour-force social reproduction): cost-of-living determines the reservation wage (the lowest wage rate at which a worker would be willing to accept a particular type of job). And cost-of-living is mainly determined by the cost of non-tradeable services (housing, health, taxes, …).
Can you recommend me some literature analysing determinants in cost-of-living differences and their impact on trade competitiveness?
Dear Hubert Escaith
Here are two resources you might find helpful:
- The Determinants of National Competitiveness (ResearchGate): This paper defines foundational competitiveness as a nation's ability to produce output per working-age person.
Article The Determinants of National Competitiveness
- Cost of Living and Standard of Living Nexus: The Determinants of Cost of Living (ResearchGate): This paper explores the factors that influence cost of living across different countries. It examines aspects like housing prices, transportation costs, and the cost of essential goods and services.
Article Cost of Living and Standard of Living Nexus: The Determinant...
I hope this helps.
Thank you for mentioning my previous works. Your explanations are roughly right, but you may be misunderstanding the structure of the whole logic. Let me explain it shortly.
I am thinking that "it is the technological progress that makes the economy more productive and affluent." In my paper in 2020 Article A new framework for analyzing technological change
, I emphasized that the technological change is the prime motive power of the economic growth. In other papers such as thisChapter The New Theory of International Values: An Overview
, I explained (or more exactly suggested) how the actual level of wages in different countries is determined. Roughly speaking, it is the level of the technology that a nation has at the moment that decides the wage level. However, the technology of a nation (that is, a set of all product and production techniques that firms in the country possess and use) can change. If the technology stay constant, the wage level remains constant. To argue the economic growth in Arthur Lewis's sense, it is necessary to analyze how the technology of a nation changes and how the wages and living standard changes change accordingly and with what speed.In my opinion, any theory of economic growth must contain two aspects: a theory that tells how the present level of income for majority of people is determined and a theory that explains how this level changes. Of course, the second is more important than the first, but it is more difficult to know. Moreover, without having the first theory, it is almost impossible to explain the second aspect.
As for you question, I am rather doubtful if the cost of living determines the wage rate of a country, which is one of the important factors that influences competitiveness. It is true that Marx believed so and many Marxists still do. But, after the Industrial Revolution (or more exactly after the end of the first English IR around 1850's), the living standard and wage rate started to increase and has increased by many times. It is doubtful if this rapid increase was driven by a rapid increase of cost of living. Common people cannot live above the constant income they gain. On the other hand, people easily become accustomed to the new level of income and adapt their living to the new level. I am sorry to point out this. You must know it better than I. However, I hope that confirming this simple fact may promote the better understanding of what the problem is.
I fully concur with Yoshinori Shiozawa arguments and the historical perspective he takes. One cannot separate improvement in living standards from technical progress. It goes beyond income, by the way: progress in medical attention has benefited the world population irrespective of income levels. But, moving from an historical to a geographical perspective, I am still amazed by the large differences in wages between countries that are seemingly similar in their access to human and technological capital. I can imagine several reasons (the weight of finance in determining exchange rates, the rule of laws, the additional income provided by some natural resources rents, etc.). And I’d love to find some literature analysing it. Cheers.
Modelling cost-of-living differences involves analyzing how variations in living expenses across regions affect trade competitiveness, influencing factors like production costs, pricing strategies, and market access for goods and services.
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