T11 - Offshoring Learning Materials The US. and Mexico both produce radios, using skilled and unskilled labor. Each radio requires three tasks to complete. Task one requires 4 units of unskilled and 2 units of skilled labor per radio; task two requires 3 units of unskilled and 3 units of skilled labor per radio; and task three requires 2 units of unskilled and 4 units of skilled labor per radio. in the U.S., the supply curve for unskilled labor is given by LU=1OOwU, where LLJ is the quantity of labor and wLJ is the unskilled wage; similarly, the supply curve for skilled labor is given by LS=100wS. In Mexico, the supply curve for unskilled labor is given by LU*=300wU*, where U\" is the quantity of unskilled labor supplied in Mexico and WW is the Mexico unskilled wage; and the supply for skilled labor is given by L5*=100w3*. The price of radios is fixed at $1, and in both countries this is the only industry. Suppose that we know which tasks are done in the US and which are done in Mexico (and no task is done in both countries). If Fl radios are produced, we can then find the demand for skilled and unskilled labor in each country by multiplying Fl by the unit labor requirements given above and equate that to the supply as a function of the wage using the supply curves as given above; call these the labor-market clearing conditions. We can then put those equations together with the zeroprofit condition, which requires the total cost of both kinds of labor in both countries for all three tasks to add up to $1. This gives us five equations in five unknowns, the four wages and R. (In what follows, we will give part of the answer by revealing the equilibrium value of Fl, to save students from having to invert the 5X5 matrix.) 1. Suppose that we know that Task two is done only in the US. because logistical problems or tariffs make it infeasible to do it in Mexico. Then Tasks two and three are done in the U.S., while Task one is done in Mexico. Suppose we know that Fl=1.2. Use the labormarket clearing conditions for Mexico to find the Mexican wages, then use the labor-market clearing conditions for the US. to find the US. wages. Show that the wages you have computed satisfy the zero-profit condition (to a reasonable approximation), so you have indeed computed a full equilibrium. 2. For the equilibrium you have just completed, verify that it would be cheaper to conduct Task two in Mexico rather than the U.S., so if radio manufacturers were able to offshore it, they would do so. 3. Now, suppose that it becomes feasible to do Task two in Mexico. Then Task three is done in the U.S., while Tasks one and two are done in Mexico. Suppose we know that R=1.63. Use the labor-market clearing conditions for the US to find the U.S. wages, then use the labor market clearing conditions for Mexico to find the Mexican wages. Show that the wages you have computed satisfy the zero-profit condition (to a reasonable approximation), so you have indeed computed a full equilibrium. 4. What is the effect of the offshoring of Task two on wage inequality in the two countries? What is the effect on the skilled-unskilled employment ratio? https:hI rm it.instructuracomlcourseslmi 8lpag es!\" 1 pshorin glearning-materials?mod ule_ite m_id= 1 93561 7 10
