Question

PC-World is a U.S. manufacturer of personal computers. The CEO is looking at opportunities for off-shore production. The selection of the country where PC-World will establish a production facility will depend on the following two factors: 1. The local wage in US$ terms; and 2. The rate of unemployment. According to the CEO, a low wage country will give the company a cost advantage, while a high unemployment rate will mean that there are plenty of workers available to work at the manufacturing facility. How would you advice the CEO regarding the use of these two indicators as the selection criteria?

Answer 1

PC-World is a U.S. manufacturer of personal computers. The CEO is looking at opportunities for offshore production. The selection of the country where PC-World will establish a production facility will depend on the following two factors: 1. The local wage in US$ terms; and 2. The rate of unemployment.

Since 1938 minimum wage was enacted in the United States. This is the minimum amount employers are legally required to pay their employees. The United States federal government set the national minimum wage rate at $7.25 per hour in July 2009. Washington, D.C. recently raised its minimum wage incrementally each year at the rate $15 per hour effective July 1, 2020. According to leading economists—including famed billionaire investor Warren Buffett—minimum wages can raise unemployment by giving employers less incentive to hire and more incentive to automate and outsource tasks that were previously performed by low-wage employees. Higher mandated minimum wages also force businesses to raise prices to maintain desired profit margins.

Since the unemployment rate is the proportion of unemployed persons in the labor force. Hence unemployment adversely will affect the disposable income of families, hence eroding purchasing power and diminishing employee morale, thus reducing economy's output. The official unemployment rate has often been cited as being too restrictive and not representative of the true breadth of labor market problems.

Henceforth a public policy in this case can have a powerful effect on the natural rate of unemployment. On the supply side of the labor market, public policies to assist the unemployed can affect how eager people are to find work. For example, if a worker who loses a job is guaranteed a generous package of unemployment insurance, welfare benefits, food stamps, and government medical benefits, then the opportunity cost of being unemployed is lower and that worker will be less eager to seek a new job. Since enacted terms of policies that will affect workers or employers and hence will incentives employees and employers.