Question

In 2013 , manufacturing workers in the United States earned average compensation of \(\$ 36.34\) per hour. That same year, manufacturing workers in Mexico earned average compensation of \(\$ 6.82\) per hour. How can U.S. manufacturers possibly compete? Why isn't all manufacturing done in Mexico and other lowwage countries?

Short answer

U.S. manufacturers compete through high productivity, innovation, logistics, advanced technology, and proximity to markets.

Step-by-step solution

Introduction to the Problem

Understand the context of the problem. We are given the average hourly compensation for manufacturing workers in the U.S. and Mexico in 2013. We need to explore why U.S. manufacturers are still competitive despite higher wages compared to Mexico.

Costs Beyond Wages

Identify factors beyond wage costs that impact competitiveness. Consider productivity rates, where U.S. workers may produce more output per hour, which can offset higher wages.

Quality and Innovation

Manufacturers in the U.S. might focus on high-quality or innovative products that fetch higher sales prices. This focus allows them to remain competitive despite higher wage costs.

Logistical Considerations

Consider logistics and proximity to key markets. U.S. manufacturers benefit from being closer to the large U.S. consumer market, reducing shipping costs and improving response times.

Trade Policies and Tariffs

Examine trade policies, tariffs, and regulations that might impact manufacturing locations. Sometimes tariffs on imported goods offset wage advantages of manufacturing abroad.

Skilled Workforce and Technology

Acknowledge the impact of a skilled workforce and advanced technology in the U.S., leading to higher productivity and efficiency, which can make operations more cost-effective overall.

Conclusion

U.S. manufacturers compete by leveraging high productivity, focusing on quality and innovation, benefiting from strategic logistics, and utilizing skilled labor with advanced technology.

Key concepts

Comparative Advantage

Comparative advantage is a fundamental economic principle that partly explains why some countries, like the United States, continue to be competitors in the manufacturing sector despite higher wages compared to countries like Mexico. This concept suggests that countries can still engage in profitable trade by specializing in goods where they have a relative efficiency advantage.

• Example: The U.S. might specialize in high-tech manufacturing where it excels in innovation and technology.
• Mexico: May focus on labor-intensive products where its low labor costs offer an edge.

This specialization allows each country to produce more efficiently and trade for other goods that it does not specialize in, benefiting from the efficiencies of the other countries. This means that even with higher labor costs, the U.S. can still provide competitive manufacturing capabilities by focusing on areas where it maintains a comparative advantage.

Productivity

Productivity plays a crucial role in manufacturing competitiveness. A highly productive worker can produce more units per hour, which helps to offset increased wages. This is one way U.S. manufacturers manage to stay competitive.

• U.S. workers often benefit from advanced training and education.
• The integration of cutting-edge technology in facilities also contributes to greater productivity.

This means that the actual cost of labor, when measured against the quantity and quality of output, can be similar or even less expensive compared to countries with lower wage rates but lower productivity levels. For instance, automation and robotics in manufacturing can significantly boost productivity, making expensive labor more economical.

Trade Policies

Trade policies are critical in shaping the manufacturing landscape. These policies include tariffs, trade agreements, and regulations that can influence where companies decide to manufacture their products.

• Tariffs: Taxes on imports can make foreign goods less competitive in the domestic market.
• Trade Agreements: Such agreements can either liberalize trade or provide incentives for companies to manufacture products domestically.

Policies not only protect domestic industries from cheaper foreign exports but also promote foreign investment in local industries. They are designed to level the playing field and can sometimes offset the benefits of lower wages in other countries. The existence of trade barriers might discourage companies from relocating their manufacturing plants to low-cost countries.

Logistics in Manufacturing

Logistics is another vital factor in the decision-making process of where to locate manufacturing operations. Effective logistics can enhance competitiveness by cutting costs and improving service delivery.

• Proximity to Markets: U.S. manufacturers are close to the vast U.S. consumer market, which saves on transportation costs and reduces delivery times significantly.
• Infrastructure: Well-developed transportation and communication networks are critical in streamlining the supply chain.

By being closer to their primary market, U.S. manufacturers can quickly respond to consumer demands and reduce inventories. Efficient logistics can thus outweigh the simple cost benefit of lower wages abroad, allowing firms to maintain an edge in both cost and customer service.