Industrial Location Decisions. Labor Costs

Of course, firms do not base their locational decisions solely on the costs of transporting raw materials and finished products. Other factors that come into play include labor costs, capital costs, and government policies.

Wages represent over half of the cost of production of most manufactured items. Throughout the world, labor costs vary dramatically. In general, wage rates are much higher in the developed countries than in the less developed countries. In recent years, many firms have chosen to relocate in less developed countries to take advantage of lower wage rates. In Mexico, an important industrial district has developed along its border with the United States largely because of wage-rate differentials between the two countries. We will discuss this zona libre in more detail later in the chapter.

Wage-rate differentials within countries are not as spectacular as international differences, yet they are important in explaining national manufacturing location patterns. In the case of the United States, wage rates have tended to be highest in the Northeast, where work forces were highly unionized (Figure 8-6). In recent years, however, the importance of union membership in industrial regions has declined. Only a minority of American manufacturing employees belong to labor unions, and unionization for workers in general continues to decline as the service sector of the economy grows at the expense of the secondary sector.

Figure 8-6 Wage Rates in the Contemporary United States. Wage rates vary considerably in the United States, with the highest levels concentrated in the traditional industrial states of the Northeast. Wage rates are related to levels of unionization, amenities, and a variety of other factors

Wage differences between the North and the South are partially offset by amenities in the Sunbelt. Housing costs and taxes are lower in the South than in the North. Warmer winters, recreational opportunities, and other noneconomic factors may keep wage rates lower in the South because many people are willing to give up higher wages in exchange for living in what they consider a more pleasant environment.

An alternative approach to explaining geographic differences in wages focuses on labor supply and demand. Economists argue that the presence of a large potential labor force keeps wages down. Until World War II, the large majority of the population of the South lived on small, no mechanized farms. Many Southerners lived well below the poverty line.

In Mississippi, per capita incomes in the 1930s and 1940s were barely a third of the national average. As a result, a large labor force was available, and impoverished Southerners were willing to work for wages unacceptable to Northern workers. Taking advantage of this cheaper labor, many firms migrated southward. Gradually, wage rates in Mississippi began to approach the national average.

Today, an analogous situation is occurring- in newly reunified Germany. Wage rates in the former East Germany were substantially lower than those in West Germany. Now that the two countries have reunified, workers from the east are moving westward in search of employment. Meanwhile, German firms are moving eastward in search of workers willing to work for lower wages.

Economic theory suggests that geographic differences in wage rates will eventually disappear. As more and more companies move into low-wage areas, wages in those areas will rise. Meanwhile, migration of companies away from high-wage areas will create unemployment, driving wage rates in those areas downward. Thus, wages are expected to equalize with the continued occurrence of these events.

Despite these expectations, wage-rate differentials tend to persist over time. An important reason is that mobility is financially and psychologically expensive. Similarly, firms may be reluctant to move to areas where prevailing wage rates are lower, even if the move promises to be more profitable. Thus, both firms and workers are characterized by locational inertia—a tendency to remain in the same place even if relocation to another place would be more profitable in the long run.