Yournext question is: what is labor's share of total manufacturing costs?

1) Get on the internet and go to the U.S. Census, i.e. towww.census.gov

2) Put your cursor on"Browse by Topic"

3) Click on "Business and Economy"

4) Click on "view all tables"

5) Click on "2018"

4)Under Tables, click on the table "2018-2020Annual Survey of Manufactures:Tables"

5) Click on "2018-2020 - Statistics forIndustry Groups and Industries"

Get these datafrom the line for 2018: employment, payroll, and sales (the heading is actually sales, value of shipments or revenues).These dataare in the first line of the table. Put those numbers in5), 6), and 7). Be sure to write down the actual amounts. Don't put 2,450 if the actual number is 2,450,000.

Be aware that payroll is only part of the cost of labor. It doesn't include fringe benefits(and other expenses incurred in employing a worker, such as payroll taxes). There are other files where you can get an idea as to what those are, but nice guy that I am,I'm going to tell you what fringe benefitsare, ballpark. Figure they are, roughly,30% of payroll. That is, the cost of the labor used in the U.S. manufacturing section = payroll + 30% of payroll. Calculate thatusing the number you got for payroll,and put that numberin8)

Recall that

revenues= the cost of labor + the cost of all other inputs + profit =total cost

Using 8) and sales(the datum you got from the Census),figure what % of total cost labor cost is and put that in9) .Not such a large percent, huh?

Well, how much lower are wages in China and India and other places where goods are manufactured and thenexported to the U.S.? I'm not going to have youget data on that. I've seen estimates by country,andthese indicate that unit labor costin China, India, and Mexico could be as low as 10% of what it is in U.S. manufacturing. So let's say that wages and fringes are10%of what they are in the U.S. That means they are what percent less? Answer:90%

Now let's figure how muchless prices would (possibly) bewhen goods aremanufactured in low wage countries instead of the U.S. How?Use the formula I gave youaboverelating the percentage change in wage, labor's cost share, and the percentage change price to figure that.Put that % in 10).

Whatdo you think? But the question is, what is the welfare gain from that decrease?Let's figure that out.

Look at the graph below. The increase in consumers' surplus when prices go down is the benefit to consumers from those price decreases in dollars.(So what does consumers' surplus measure? What does it mean to say it's the benefit from lower prices? Answer: it is ___ for lower prices. Put what should go in the blank in 11)).

As you can see,there are two parts to it, right? The area of a rectangle(area D)and the area of a triangle(E). You can figure the area of the rectangle using the numbers you calculated. Why? That area is just the decrease in spending on what was being bought originally. So if spending on a group of goods was originally$3 billion, and the prices of those goods when down by say 10%, how much less would be spent on that group of goods if they were purchased at the lower prices? Answer: 10% of what was originally spent!That is $300 million.

What we want to know is the welfare gain from the lower prices of the goods we're currently importing. That'sone component ofthe benefit from current trade policy, and therefore, what we would lose if we drastically cut imports. Also, we're going to confineour attention to consumer goods importedfrom Asia and Mexico (Asiaexcluding Australia and Japan), i.e. countries were wages are considerably lower than they are here in the U.S.

price

p

D EMD

p'

quantity

Look at the graphagain. We want to know what D +E is. As it happens, ifprice elasticities of demand are-1, spending when price is p will be the same as spending when p' (p' is the price of the imported goods and what we observe is spending when price is p', i.e. what we are actually observing). Therefore, to get D, we simply take observed spending and multiply by the percentage decrease in price, i.e. how much lower the prices of imported goods are than domestically produced goods, percentage-wise. Well, you have your estimate of the percentage difference in price. So all you needto figure thisis how much is being spent on imported goods. In 2018 that was$375,759,000,000.Use that amount and your estimate of the price difference tomake anestimate of D. Put your estimate of Din 12).

I've calculated area E for you. It's $1 billion. So add that to your estimate of D and you have an estimate of the annual benefit from imported consumer goods, to consumers. Let' see what the benefit is, per capita. Assume the population of the U.S. is320,000,000. Divide that into the increase in consumers' surplus (your number for D + $1 billion) to get the per capita benefit. Put that number in 13).Now a particularly large amount, huh? Be aware that this is a very rough estimate. Some claim the benefit is much greater than this.

OK, one last calculation. The story told by many is that the American worker is worse off as a result of international trade. Why? Because when production moves to other countries, the demand for labor goes down.As you should guess(using a fixed supply of labor and a downward sloping demand for labor schedule), this would cause wages to go down.Now, in the neighborhood of160,000,000Americans were employed in 2018. How muchwould a worker's wage have togo downdue to international trade (on average) forlost wages to be equal tothe welfare gain created by international trade? Put that number in14)

So, if wages went down more than this on average, the gains from lower priced consumer goods would be less than lost wages. Now, let's go back to what you did on the second assignment. Let's estimate the decrease in the demand for labor due to imports replacing goods produced in the U.S. In 2018,spending on domestically produced goods and services was $23,750.1 trillion.Using 160,000,000 as the number of individuals employed in 2018, figure spending per worker andput that number in 15).

Well, a guestimate of the decrease in the demand for labor (number of jobs lost) from$375,759,000,000 worth of goods and services being produced abroad instead of in the U.S. can be made by dividing that amount by the number you put in 15). Do that, and put that number in 16). Add that number to 160,000,000 and divide that sum into the number in 16). That's our guestimate of the percentage decrease in the demand for labor due to imports.

OK, that percentage decrease is1.56%. So, here's the formula we would use to figure out what effect that percentage change in demand will have on the wage:

% change in demand due to imports + % change in demand due to the change in wage

caused by imports

= % change in labor supply

Figure out what that percentage change in the wage would be if the elasticity of the demand for labor with respect to the wage is-.5. Also assume that the supply of labor is constant, i.e. % change in labor supply = 0. Put your estimate of the percentage change in the wage in 17).

Well, is our estimate of the benefit to an individual from imports greater than or less than the decrease in theannualwage ofthe average worker in 2018? (That wagewas$64,716) Put greater than or less than for 18). Now compare the benefit from imports for a household of 3 people to the change in the wage of a worker. Is the household benefit greater or less than the loss of wages?Put greater or less in 19).