Leontief Paradox

This section explains the implications of employee productivity for the labor intensity of an industry. The section describes Leontief’s observation that labor cannot be measured only in terms of the absolute number of workers and working hours but that it is important to look at their competencies, motivation, and skills which causes productivity.

Wassily Leontief carried out the first test (Leontief, 1951) of the Heckscher-Ohlin theorem with statistical data in 1951 (Exhibit 1-22). Leontief used USA data from 1947 and onwards. The USA was the most capital-intensive country in the world at that time, so Leontief hoped to find that, according to the Heckscher-Ohlin theorem, the USA exported capital-intensive goods and imported labor-intensive goods. The USA had relatively much more capital than human resources. The results of Leontief’s test differed from what he had expected and from what the Heckscher-Ohlin theorem should have given. The USA imported more capital-intensive products than it exported, and the USA exported more labor-intensive products than capital-intensive ones. The question was why, even though the USA has relatively more capital than labor, does it export more labor-intensive products? According to the Heckscher-Ohlin theorem, the opposite should be true. It is the opposite factor that happened in the USA with the use of labor resources that is called the Leontief paradox (Leontief, 1956).
Although Leontief’s results were contrary to the Heckscher-Ohlin theorem, he did not try to disprove or neglect the theorem but rather to find the reasons why it happened. Leontief’s additional research showed that although the USA had less labor than capital in relative terms, labor in country was about three times more productive than labor abroad. A worker in the US produced three times as much output per unit of time as a foreign worker. According to Leontief’s calculations, the human resources available in the USA should be multiplied by three, and only then should their relative quantity to the available capital be assessed. The labor force’s productivity in the USA has led to abundant labor, allowing the production and export of labor-intensive products. It was harder to explain why labor is more productive in the USA than in other countries. This may have been influenced by the just-ended World War II, which affected the whole world and workers’ physical, emotional, and moral conditions in many countries (Leontief, 1964). The study is based on data collected right after the war has ended, which may not be representative and valid in normal circumstances. Another aspect which may have influenced the import and export statistics was the import duties imposed by the USA.

Ex. 1‑22 Vassilij Leontief’s paradox discovery in the context of other significant events

Keywords: II world war, Vassilij Leontief

More details on export and import restriction taxes are given in Part B, Chapter 3 of the book. A third aspect that explains the paradox’s reasons is capital valuation. Leontief included only physical capital, e.g., machinery, other equipment, buildings in the USA measurement of capital value. In contrast, he attributed all intangible capital – human resource training, education, health – to labor. In fact, it is precisely the intangible capital of human resources that increases productivity. A better-trained worker produces more output than a less-trained one. This means that the US workforce has accumulated more intangible capital of knowledge and experience than the foreign workforce.
In two studies published in 1956, the American researcher Irving B. Kravis found that wages in the USA export oriented industry were 15 percent higher than wages in the USA local market-oriented industry, which competes intensively with imported products (Kravis 1956b). Kravis correctly argued that the higher wages in the USA export industry reflect the higher productivity and human capital of USA exports than USA import substitutes (Kravis 1956a). In a 1966 study, another American scholar, Donald B. Keesing, found that USA exports were more labor-intensive than those of nine other industrialized countries (Keesing, 1966). This reflected the fact that the United States had the most highly trained workforce, embodying more human capital than the other industrialized countries. Thus, while the quantity of labor can be expressed in terms of the number of workers, it is important to assess the productivity of these workers as compared to workers in other countries in the same job or for the same product (Exhibit 1-23). Leontief’s paradox became a strong argument for strengthening education and training systems and developing competencies on the political agenda in the second half of the 20th century in Western Europe and the rest of the world. Of course, there are more arguments and reasons why one country’s workers are more productive than another.

Ex. 1‑23 Vassilij Leontief paradox

Keywords: production factors, labour intensity

It is not always entirely up to the will of the worker. For example, the specialization of the workforce, which is only possible because of economies of scale and mass production, only allows workers’ skills to increase in a particular narrow job or function. More about it in section on the theory of economies of scale and specialization.

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