Protection and Real Wages The Stolper-Samuelson Theorem.pdfVIP

Protection and Real Wages: The Stolper-Samuelson Theorem Rachel McCulloch* April 2005 This essay is a contribution to Michael Szenberg, ed., Samuelsonian Economics and the 21st Century, a volume honoring Paul A. Samuelson on his ninetieth birthday. Chad Bown and Gary Chamberlain provided helpful comments. *Rachel McCulloch is the Rosen Family Professor of International Finance at Brandeis University. Protection and Real Wages: The Stolper-Samuelson Theorem Rachel McCulloch Second only in political appeal to the argument that tariffs increase employment is the popular notion that the standard of living of the American worker must be protected against the ruinous competition of cheap foreign laborAgain and again economists have tried to show the fallaciousness of this argument. Thus begins Stolper and Samuelson’s (1941) analysis of the effect of protection on real wages, a landmark contribution to the modern theory of international trade. The central result, now known as the Stolper-Samuelson theorem, is that “international trade necessarily lowers the real wage of the scarce factor expressed in terms of any good.” The paper signals a transition in the debate among international economists concerning the welfare consequences of free trade, from largely verbal reasoning toward the use of formal general-equilibrium models. Derived in a simple framework of two homogeneous factors, each freely mobile between two domestic industries, the Stolper-Samuelson theorem is striking because it demonstrates that a productive factor’s ability to relocate from an import-competing to an export industry does not prevent a loss in real income due to expanded trade. Moreove