Question

What is the role of labor productivity in location decisions? Why is it more important than low wages in location decisions?

Answer 1

Answer: Location decisions are important as they affect both fixed and variable costs. In addition, these decisions also affect the overall risk and profit of the organization. Every organization considers various factors that may have a significant impact on its performance. Labor productivity and getting cheap labor to reduce cost are one of the most important factors that affect location decisions to a great extent.

Labor productivity is an important factor while locating a facility in any area. In the context of productivity, the output can be expressed as the total quantity produced by employing the available resources. Labor productivity differs from one location to another. In other words, you may not expect that a labor output would be the same across the world. The difference in labor output happens due to several reasons such as the arrangement of raw materials, labor skills, availability of distribution channels, environmental adjustments, etc. Productive labor is essential for high output.

A producer might select a location where labor is available at cheaper prices or at low wages. However, here it is important to understand that labor with low wages may not be very productive as he/she may lack in necessary skills. Therefore, labor productivity is considered a more important factor than low wages in location decisions.