Labor-Capital Relationship
Labor-Capital Relationship
When labor is abundant in relation to capital, cheap labor rates and export competitiveness in products requiring large amounts of labor relative to capital would be expected. The opposite would be anticipated when labor is
scarce. India, Iran, and Tunisia, for instance, excel in the production of handmade carpets that differ in appearance as well as production method from the
carpets produced in the United Kingdom and the United States made by ma-
chines purchased with cheap capital,
Studies examining the labor-to-capital relationship have shown that ex-
port competitiveness is sometimes surprising, however. For example, Wassily
Leontief found that in the United States, those industries that were more suc-
cessful exporters had a higher labor intensity than those that faced the most
import competition.9 Because of the presumption that the United States has
abundant capital relative to labor, this surprising finding is known as the Leontief paradox. Several possible explanations have been proposed for this finding.
One of the most plausible is that the Heckscher-Ohlin theory assumes erroneously that production factors are homogeneous. Labor skills are, in fact, very different within and among countries, since different people have different training and education. Training and education require capital expenditures that do not show up in traditional capital measurements, which include only plant and equipment values. B_yjnodifying the Heckscher-Ohlin theory to account for different labor groups and the capital invested to train these groups, the factor-proportions theory seems to hold. If we look at labor not as a homogeneous commodity but rather by categories of labor, we find that the industrial countries actually have a more abundant supply of highly educated labor (to which a high capital expenditure has been made) than of other types. Industrial country exports embody a higher proportion of professionals such as scientists and engineers; thus they are using their abundant production factors. LDC exports, on the other hand, have a high intensity of less-skilled labor.
When labor is abundant in relation to capital, cheap labor rates and export competitiveness in products requiring large amounts of labor relative to capital would be expected. The opposite would be anticipated when labor is
scarce. India, Iran, and Tunisia, for instance, excel in the production of handmade carpets that differ in appearance as well as production method from the
carpets produced in the United Kingdom and the United States made by ma-
chines purchased with cheap capital,
Studies examining the labor-to-capital relationship have shown that ex-
port competitiveness is sometimes surprising, however. For example, Wassily
Leontief found that in the United States, those industries that were more suc-
cessful exporters had a higher labor intensity than those that faced the most
import competition.9 Because of the presumption that the United States has
abundant capital relative to labor, this surprising finding is known as the Leontief paradox. Several possible explanations have been proposed for this finding.
One of the most plausible is that the Heckscher-Ohlin theory assumes erroneously that production factors are homogeneous. Labor skills are, in fact, very different within and among countries, since different people have different training and education. Training and education require capital expenditures that do not show up in traditional capital measurements, which include only plant and equipment values. B_yjnodifying the Heckscher-Ohlin theory to account for different labor groups and the capital invested to train these groups, the factor-proportions theory seems to hold. If we look at labor not as a homogeneous commodity but rather by categories of labor, we find that the industrial countries actually have a more abundant supply of highly educated labor (to which a high capital expenditure has been made) than of other types. Industrial country exports embody a higher proportion of professionals such as scientists and engineers; thus they are using their abundant production factors. LDC exports, on the other hand, have a high intensity of less-skilled labor.
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