Transcript PowerPoint: Wages and International Competitiveness

Long run effects of a change in
wages
• Substitution Effect: Change in labor
demand caused by a change in relative
input prices, holding output fixed
– Always toward input that became relatively
less expensive
• Scale Effect: Change in labor demand
caused by a change in output, holding
relative input prices fixed
– Always in the same direction as change in
output
Complements and substitutes
Suppose price of capital falls. What will happen to
labor demand?
Substitution effect?
Away from N
Scale effect?
Toward N
Total effect?
Depends on whether gross substitutes or gross
complements
Complements and substitutes
• Two inputs x and y are gross substitutes if
as the price of x rises, the quantity of y
demanded rises
– PX
–
Substitution effect toward y
Scale effect away from y
Substitution effect dominates
Complements and substitutes
• Two inputs x and y are gross complements
if as the price of x rises, the quantity of y
demanded falls
– PX
–
Substitution effect toward y
Scale effect away from y
Scale effect dominates
If gross complements, scale effect
dominates
Suppose price of capital falls. What will
happen to labor demand?
Substitution effect?
Away from N
Scale effect?
Toward N
Total effect toward N
If gross substitutes, substitution
effect dominates
Suppose price of capital falls. What will
happen to labor demand?
Substitution effect?
Away from N
Scale effect?
Toward N
Total effect away from N
High wage
Cost minimizing combination of H, l
MPH
P*MPH
wH
=
=
MPl
P*MPl
wl
H0
wH
P*MPH
l0
=
wl
P*MPl
Low wage
Long-Run Demand for Labor and relative
unit labor costs
Cost minimizing combination of H, l
wH
wl
=
P*MPH
P*MPl
Approximate by relative unit labor costs:
wH
wl
=
P*(Q/N)H
P*(Q/N)l
Judith Banister. “Manufacturing earnings and compensation in China.” Monthly Labor
Review August 2005
Source: Bureau of Labor Statistics
Source: Bureau of Labor Statistics
Source: Bureau of Labor Statistics
Values >100 imply that costs have risen
faster in the U.S.
Source: Bureau of Labor Statistics
WI / WUS
API / APUS
Golub S.S.; Hsieh C-T.“Classical Ricardian Theory of Comparative Advantage Revisited.”
Review of International Economics May 2000
Various corrections for currency value
Golub S.S.; Hsieh C-T.“Classical Ricardian Theory of Comparative Advantage Revisited.”
Review of International Economics May 2000
No relationship between w and ULC
Peter F. Orazem (1998) “Empirical Isoquants and Observable Optima: Cobb and Douglas at
Seventy” Review of Agricultural Economics 20: 489-501.
As ULC increases, require rising tariff
protection to keep producing
Peter F. Orazem (1998) “Empirical Isoquants and Observable Optima: Cobb and Douglas at
Seventy” Review of Agricultural Economics 20: 489-501.
Toyota vs GM
Production Time per Vehicle
GM:
34.3 hours, 2.5% improvement since 2003
Toyota: 27.9 hours, 5.5% improvement since 2003
Source: 2005 Harbour Report
Average Labor Cost per U.S. Hourly Worker
GM: $73.73
Toyota: $48
Source: GM & Toyota
Profitability per Vehicle
GM:
Loses $2,331 per vehicle
Toyota: Makes $1,488 per vehicle
Source: 2005 Harbour Report
How important is outsourcing for
job loss in the United States?
Action
Mass Layoff Events
Total excluding seasonal
Separations
3,222
641,519 (0.4% of LF)
with movement of work
366
73, 217 (11% of Total)
movement within country
259 (est)
57,020 (8.9% of Total)
movement out of country 107 (est)
16,197 (2.5% of Total)
52% of outsourcing is to China and Mexico
Brown , Sharon P., and Lewis B. Siegel. “Mass Layoff Data Indicate Outsourcing and Offshoring
Work.” Monthly Labor Review 128 (August 2005): 3-10.
Outsourcing represents about 1% of all job losses
(U.S. destroys 30 million jobs per year)
U.S. has a $51 billion trade surplus in services
Bednarzik, Robert W. “Restructuring information technology: is offshoring a concern?” Monthly Labor
Review 128 (August 2005): 11-21.
• From 1979-1999, 69% of
nonmanufacturing workers who lost jobs
from outsourcing found jobs within one
year.
• 55% of these employed at lower pay
• 25% had pay cuts of 30% or more
Circuit City lays off all sales associates paid 51 cents or more per hour
above an "established pay range" - essentially firing 3,400 of its top
performers in one fell swoop. Over the next eight months Circuit City's
share price drops by almost 70%.