A recent study from the San Francisco Federal Reserve upends what many people thought about tariffs and their impact on the economy. Looking back 150 years, the researchers found that when tariffs go up, inflation tends to go down, but unemployment goes up. This goes against the common idea that tariffs boost jobs but also push prices higher.
The initial explanation offered by the Fed was that tariffs hurt demand—by scaring investors and making borrowing more expensive—which leads to less spending, fewer jobs, and lower prices. But there’s a more convincing explanation that fits the data better and aligns with policies seen in recent years, especially during the Trump administration.
For decades, American industries that trade internationally have struggled to compete with cheap labor abroad, especially in countries like China. To keep prices low, U.S. companies often kept wages down, invested less in new technologies, and hired many low-skilled workers. This created a cycle of low wages and low productivity, where many jobs existed but they were often low-quality and poorly paid.
Tariffs change that picture. When broad tariffs are set—not just for one industry but across the board—the pressure from cheaper foreign competition eases. This means companies don’t have to race to the bottom on wages anymore. Workers gain more power when they bargain for pay, since companies can’t easily move jobs overseas. And because wages start to rise, firms find it less sensible to rely solely on cheap labor. Instead, they invest in machines, training, and better production methods.
Other policies like restricting low-skilled immigration, reducing taxes on capital, and lowering interest rates add to this shift. Together, these factors push companies away from low-wage “sweatshop” jobs toward fewer, better-paying, and more productive roles.
This shift explains why unemployment might rise temporarily—some low-skill jobs disappear—but total output doesn’t drop and may even grow. The economy is simply changing the kind of work it supports.
But what about prices? Tariffs are usually seen as adding costs that companies pass on to customers. Still, the study finds prices falling over time. The key is looking at what it costs employers to produce one unit of goods, called unit labor costs. This depends on wages and how much each worker produces.
When workers earn more but produce even more, the cost per unit actually goes down. Companies with lower costs can afford to lower prices or at least not raise them much, which helps bring down inflation.
In short, tariffs combined with smart policies can push the economy toward higher productivity and wages while keeping prices steady or even falling in the long run.
Both stories—the one about tariffs crushing demand and the one about tariffs encouraging better jobs—fit the data from the San Francisco Fed. But looking at the actual policies, especially in recent years, the supply-side story seems to make more sense. Tariffs, along with tough immigration rules and tax breaks on capital, have helped reshape the economy.
That doesn’t mean every tariff is a good idea or that current tarif levels are perfect. Still, this research shows tariffs can do more than just discourage spending. They can help break a cycle of low wages and low productivity, leading to better jobs and cooler inflation.
So the next time tariffs come up in debate, it’s worth remembering they can change how products are made—not just how much stuff people buy.
