Relative wages

The relative wage is the amount that workers in one country receive as an hourly wage compared to the hourly wages for workers in another country. The relative wage is assigned to the generic term foreign trade , especially the theory of international trade, in particular the Ricardo model .

calculation

The relative wage is calculated as follows:

${\displaystyle {\frac {\text{Stundenlohn der Arbeiter im Inland}}{\text{Stundenlohn der Arbeiter im Ausland}}}={\frac {w}{w^{*}}}}$

Relative wages and specialization

A good is always produced where it is cheaper to produce than in other countries.

Thus:

${\displaystyle w\cdot a\cdot L_{i}<w^{*}\cdot a^{*}\cdot L_{i}}$

respectively:

${\displaystyle {\frac {a^{*}\cdot L_{i}}{a\cdot L_{i}}}>{\frac {w}{w^{*}}}}$

With

• ${\displaystyle a\cdot L_{i}}$ = Domestic labor coefficient for a specific good
• ${\displaystyle a^{*}\cdot L_{i}}$ = Work coefficient abroad for a specific good

That means: the costs for the production of the goods are cheaper domestically than abroad. That is why the country produces the good . ${\displaystyle i}$ ${\displaystyle i}$

If the goods are cheaper to produce abroad, the following applies: ${\displaystyle i}$

${\displaystyle w\cdot a\cdot L_{i}>w^{*}\cdot a^{*}\cdot L_{i}}$

respectively:

${\displaystyle {\frac {a^{*}\cdot L_{i}}{a\cdot L_{i}}}<{\frac {w}{w^{*}}}}$

Relative wages in the one-factor model of world trade

The one-factor model is the simplest foreign trade model. A country produces the good where it has a comparative advantage ; H. where the opportunity costs for the production of the good are as low as possible compared to other countries.

example

The domestic market has a comparative advantage in the production of bratwurst and the foreign one in the production of beer. Furthermore, there is complete competition in the market and there is only one production factor “work” and two goods, bratwurst and beer. The inland requires 2 hours to produce 1 kilogram of bratwurst. In other countries, however, 4 hours for 1 liter of beer. Thus the worker of the domestic company earns 1/2 kilogram of bratwurst per hour and the worker of the foreign one 1/4 liter of beer per hour.

For example, if the price for a kilogram of bratwurst is 8 euros and the beer price for a liter is also 8 euros, then the relative wage is calculated:

• The domestic worker earns € 8 per kg / 0.5 kg = € 4 / h
• The foreign worker earns € 8 per kg / 0.25 l = € 2 / h

w / w * = € 4 / € 2 = 2

The relative wage of the domestic worker is twice that of the foreign worker.

Relative wages for several goods

The relative wage is not as easy to determine here as in the one-factor model. Here the relative wages must be known in order to determine who is producing what. In order to be able to determine the relative wages for several goods , the relative demand for labor implied by it must be considered behind the relative demand for goods. This is a derived demand , which results from the demand for the goods that are produced by labor in the respective country. If domestic wages rise relative to foreign wages, then relative derived demand falls.

There are two reasons for this:

1. The world demand for these goods decreases when the domestically produced goods become more expensive with domestically increasing labor costs.
2. With rising domestic wages, more goods are produced abroad than domestically, so that the demand for labor at home continues to decline.

example

Determination of the relative wages with RS = world supply and RD = world demand

The domestic wage rate is 3.5 times higher than abroad. The home would therefore produce apples, bananas and caviar, and the rest of the world would produce dates and enchiladas.

If the relative wage increases to 3.99, the specialization structure remains unchanged. But the goods produced domestically would become more expensive and the relative demand for these goods would decrease, with the result that the relative demand for domestic labor would also decrease. Only when the relative wage increases to 4.01 does the specialization structure shift, because the production of caviar would now be cheaper abroad than at home. As a result, the relative domestic demand collapses abruptly, because the domestic production of caviar would drop to zero and the foreign country would get a new industry.

The relative wage is in equilibrium where RS and RD intersect. If RS and RD are in equilibrium on a flat section (see blue line in the figure), then both countries produce this good.

See also

• Relative wage

Individual evidence

1. ^ Paul R. Krugman / Maurice Obstfeld: Internationale Wirtschaft , 7th edition

literature

• Paul R. Krugman, Maurice Obstfeld: International Economy: Theory and Politics of Foreign Trade , Munich 2006, 7th edition, ISBN 978-3-8273-7199-7