International Trade Theory and Policy
by Steven M. Suranovic

Trade 70-18A

Answer: Q70-18

In other words, maybe when the price rises the owners of the export firms simply pay the CEO and the rest of management a few extra million and not give any of the extra revenue to the ordinary workers. Actually this is unlikely under the assumptions of the model. First of all the model has no owners or management. Instead all workers are assumed to be the same and no workers have any special ownership rights. But let's suppose that there is an owner. The owner can't claim a huge pay increase because the industry is assumed to be perfectly competitive. This means that there are hundreds or thousands of other export firms who have all realized a price increase. Although workers are assumed to be immobile across industries, they are not immobile across firms within an industry.

So let's suppose that all of the firm's owners simply pocket the extra revenue. If one of these owners wants to make even more money, it is now possible. All she must do is reduce her pay somewhat and offer her workers a higher wage. The higher wage will entice other workers in the industry to move to the generous firm. By increasing worker's wages, this owner can expand her own firm's output at the expense of other firms in the industry. Despite a lower wage for the owner, as long as the increased output is sufficiently large the owner will make even more money for herself than she would have had she not raised worker wages. However, these extra profits will only be temporary since other owners would soon be forced to raise worker wages to maintain their own output and profit. It is this competition within the industry that will force wages for workers up and the compensation for owners down. In the end economic profit will be forced to zero which implies that owners will receive just enough to prevent them from moving to another industry.

International Trade Theory and Policy - Chapter 70-18A: Last Updated on 9/16/99

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