Does Paying More to Hire Americans Help Americans?
Should firms pay a premium for products that are “made in America”? The obvious answer is “yes” if consumers are willing to pay a premium for a “made in America” label, but the benefit to Americans isn’t so clear.
Last Summer, my wife and I visited the new Westin Hotel here in Birmingham (my review, if you’re interested). I opted to pay $5 to rent New Balance workout gear. The shirt and shorts were clean and comfortable, the sneakers looked brand new and even though they’re one size below the 14s or 15s I normally wear, they were still pretty comfortable.
The tag on the socks struck me (and I was allowed to keep the socks; in fact, I still wear them regularly). New Balance advertises their commitment to American workers by noting that the socks are made in the US with American and imported yarn.
I interpreted this to mean that they were willing to pay a premium for socks made by Americans even though they could have gotten socks of the same quality from a foreign supplier for a lower price (otherwise, it’s just cheap talk). I like New Balance, and my newest pair of sneakers was made by New Balance. They make very good products. Notice, though, that American workers are also American consumers. By over-paying to get socks made by Americans, they end up over-charging American sock buyers.
Suppose my rental would have been $4.75 instead of $5. In the first case, I have an extra quarter I can keep in the bank. Add that to all the other quarters Westin customers would save and you would have something: a loan for a firm that wants to expand (or start) operations, or a mortgage for a family looking to buy a new house.
Suppose Westin would’ve kept the price at $5 and just pocketed the extra quarter. What happens then? Westin’s parent company could reinvest that extra quarter in more and better hotels. This would make labor more productive and increase earnings. Westin could also distribute their accumulated quarters to shareholders, who would enjoy higher standards of living. They could either invest their share of the profits (raising the capital-to-labor ratio and raising wages) or consume them (by spending more nights at nice hotels or by eating better food).
Alas, they have no such option because the socks I’m wearing right now were made using relatively expensive American labor. It’s New Balance’s right to do so, to be sure, but the world is a poorer place for it.