Differences in productivity are usually the major force behind differences in wa

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 17 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 60 pesos per day for an 8-hour work day, and the exchange rate between Mexican pesos and U.S. dollars is 14 pesos per dollar. The federal minimum wage in the United States was $7.25 per hour.

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? For mugs produced in the United States?

b. With regard to mug production, how much higher are labor costs per hour in the United States?

c. With regard to mug production, how much higher are labor costs per unit in Mexico?

Explanation / Answer

(a) The hourly minimum wage in the U.S. of $7.25 and an hourly minimum wage in Mexico of $0.536 [i.e. 1/14) * 7.5].

The cost per mug in the U.S. is $0.426 (= $7.25 (wage per hour) / 17 (mugs per hour)).

The cost per mug in Mexico is $0.536 (= $0.536 (wage per hour) / 1 (mugs per hour))

(b) Labor costs per hour in the United States is $6.714 (i.e. $7.25 - $0.536 = $6.714) higher.

(c) labor costs per unit in Mexico is 0.11 (i.e. $0.536 - 0.426 = $0.11) higher.

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