Wages:

In international trade, wages and productivity are closely connected; Differences in productivity explain 70 80 percent of the international variation in rates of labor compensation. Because wages and productivity of the developing economies are each a small fraction of their U.S. counterparts, unit labor costs diverge much less than simple comparisons of wage rates suggest. For instance, wages in Malaysia in 1990 were 10 percent of wages in the United States. But Malaysian labor productivity was also about 10 percent of the U.S. level in 1990. Unit labor costs (the ratio of wages to productivity) were approximately the same in Malaysia and the United States, because the difference in productivity almost exactly offset the difference in wages between the two countries. In this case, companies have no incentive to shift production from the United States to Malaysia.

In general, international differences in unit labor costs are much smaller than differences in wage rates suggest, because the huge international disparities in wages mostly reflect equally large differences in productivity. The unfairness argument focuses on fringe benefits and safety conditions rather than wages, but it reflects the same confusion of comparative and absolute advantage discussed above. First, for a given level of labor costs, the division between wages and fringe benefits is largely irrelevant for international competitiveness, although it may not be a matter of indifference to workers. Second, wages are the most important component of labor costs even in developed countries. Third, mandating increases in fringe benefits such as vacation and maternity leave may simply alter the composition of labor compensation and not its total size. Fourth, even where they do affect labor costs, weak labor standards, like low wages, are likely to be a consequence of low productivity and poverty, not an independent source of international competitiveness. Exchangerate variations in particular can have dramatic short and mediumterm effects on wages.