Question

Differences in productivity are usually the major force behind differences in wages and unit labor costs. Suppose that a single unskilled worker at a pottery factory in Mexico can produce 1 mug per hour. By comparison, suppose that a single unskilled worker at a pottery factory in the United States can produce 16 mugs per hour because more and better machinery generates higher labor productivity. The Mexican mugs and the American mugs are identical in quality and durability and sell for the same price. The daily minimum wage in Mexico is 70 pesos per day for an 8-hour work day, and the exchange rate between Mexican pesos and U.S. dollars is 8 pesos per dollar. The federal minimum wage in the United States is $7.25 per hour. Instructions: Round your answers to 3 decimal places. a. If unskilled pottery workers are paid the local minimum wage in both countries, how much is the labor cost per mug for mugs produced in Mexico? per mug For mugs produced in the United States? per mug b. With regard to mug production, how much higher are labor costs per hour in the United States? per hour c. With regard to mug production, how much higher are labor costs per unit in Mexico? per unit d. Do higher labor costs per hour always imply higher labor costs per unit? (Click to select) e. If firms with lower labor costs per unit expand, while those with higher labor costs per unit contract, in which country will mug- making firms be increasing in size and hiring more employees? (Click to select) If unskilled pottery workers relocate to where they can find jobs, to which country will they be moving? (Click to select)

Answer 1

1. Labor cost per mug in Mexico = Wage per day/Total mugs produced per day

Labor cost per mug = 70/8 = 8.75 pesos per mug

Labor cost per mug in US = Wages per day/ Total mugs produced per day

Labor cost per mug in US = 7.25/16 = $0.453 per mug.

2. Labor cost per hour in Mexico in dollars = 8.75/8 = $1.09

Labor cost in US are higher by (7.25 – 1.09) = $6.11

3. Labor cost per unit in US = $0.453

Labor cost per unit in Mexico = $1.09

Labor cost per unit are higher in Mexico by (1.09-0.45) = $0.64

4. No, because high labor cost per hour are result of higher productivity.

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