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Your "quick question" is a good one, quite complex, and probably deserves its own thread. For example, does your "completely free market" allow companies to import an unlimited supply of foreign workers? Does that qualify as "keeping jobs inside a country"? If that's the case, I imagine those higher wages would find a new (lower) equilibrium. But I'll try to give the "short" version of an answer.
1. Quality of the goods/services: I remember a time when Americans bought shoes made in Maine by companies like Bass and Dexter. Maine shoemakers had been producing quality footwear even before the American Revolution. I could always count on these shoes to be well-made, as opposed to imported shoes from Asia. For example, the American shoes' uppers and soles were all cowhide (no synthetics) and sewn. But most Americans didn't notice the synthetic materials and glue in the Chinese-made shoes. They only saw one thing: the price. Leveraged buyouts and inept managements that cheapened the shoes while attempting to cut costs sealed the decline of these American brands. Another example: kids' bicycles. At one time, companies like Murray, Huffy, and Schwinn wrote the book on quality children's bicycles. The Chinese began to flood the U.S. market with poorly crafted but inexpensive bikes. Once again, most Americans didn't concern themselves with quality as much as price. As long as Little Johnny didn't care about the cheap materials and poor craftsmanship, neither did Mom or Dad. The American companies thought the only way to compete was to produce their bikes overseas as well and sell through mass merchants like K-Mart. One consequence of this decision was the Americans taught the Chinese how to make better bicycles. The Chinese took what they learned and used it to extend to the American companies the coup de grace.
2. Caché: What's "cool" and fashionable can allow a company a significant competitive advantage. There was a time when Americans would pay a premium price for Levi's denim jeans. Levi's jeans really weren't better than a pair of Lee or Wrangler jeans. The difference was Levi's were sold by an iconic American company only at smaller specialty chains and boutiques like Miller's Outpost and The Gap. But the company damaged the brand after it significantly ramped up production and began selling its signature jeans to large chains like Sears and K-Mart. Once again, a series of leveraged buyouts and inept management caused more damage to the "American" brand when production was shifted to cheaper foreign plants in response to competition. Levi Strauss' expensive "American" jeans had essentially become a foreign-made commodity, so, to the average K-Mart shopper, paying less for a store brand was a no-brainer.
The company also missed the boat on designer jeans, although in recent years it responded to the success of American-made brands like True Religion by once again producing a premium line of denim jeans in the U.S. You won't find these jeans at K-Mart. Presumably, the company learned its lesson.
3. Limited Competition: Jobs in certain industries are, for practical reasons, less susceptible to foreign competition. Examples: neighborhood bars/lounges, supermarkets, hair salons, residential construction, restaurants, hotels, urgent care clinics, utilities, tourism/entertainment venues. I mean, good luck replicating the New York Yankees, Yosemite, or Disney World.
4. Skill level of the workforce: Germany has high labor costs, but it also has a productive, highly-trained workforce that produces goods such as luxury autos, machine tools, and optics in which so much value is added that companies can more than afford to support higher wages.
5. Quality-of-life issues: American firms produce a lot of goods in Mexico, but some companies have moved management positions back to the U.S. due to security threats, including kidnappings and the ongoing drug war in that country.
6. Access to research/technology: It's no accident that firms in research-intensive industries find it beneficial to locate near major universities/research centers in order to gain access to talent/research and initiate joint agreements and ventures. Examples: Silicon Valley, Research Triangle, Route 128.
I'm sure there are other factors I could come up with if I thought about it long enough, but my basic point is if managements are enlightened and can see beyond the dollar signs they have hanging from their noses they can pay relatively high wages and still make money. In fact, producing in an "expensive" country can be good business under the right conditions.
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