Assignment: Wealth and International Trade
1. Importing goods produced by low-wage workers abroad decreases the demand for low-skilled U.S. labor that makes competing goods. Supply and demand analysis shows that the equilibrium wage rate of low-skilled workers making these competing goods and services will fall and experience bears this out. However, dire warnings that sweatshop labor conditions will be imported along with the foreign goods are unfounded. Suppose an employer in the United States faces competition from a foreign producer who pays the equivalent of $1 a day. Explain why, even if there were no minimum wage laws, this employer could not succeed by lowering the wage rates of his or her U.S. workers to $1 a day.
2. American Apparel is the largest T-shirt manufacturer in the United States. All of its manufacturing is done in a single factory which employs 4,000 workers in central Los Angeles. The owner of this firm, Dov Charney, has been praised for treating his workers well:
“Pay is performance-related, and amounts to $12 an hour on average, far above California's minimum wage of $6.75. American Apparel staff can buy subsidized health insurance for $8 a week. They are entitled to free English lessons, subsidized meals and free parking.” (“The Hustler,” The Economist, January 4, 2007.)
The article goes on to delineate the high cost of these non-wage benefits. But Mr. Charney claims not to be an altruist. He is simply trying to maximize profit. Why might Mr. Chareny’s profit be higher by paying all the added benefits to his workers?
3. Use the graph below to answer the following questions: