Question

What's wrong with the following statement? Labor costs in the U.S. are the highest in the world, because wages are the highest.

Answer 1

The labor demand curve is the Marginal revenue product of labor (MRPL) curve which is downward sloping. The negative slope means that as wage rate rises (falls), quantity of labor demanded falls (rises). Since

Labor cost = Wage rate x Quantity of labor demanded (hired),

Labor cost will increase if wage rate increases, and/or quantity of labor demanded increases (decreases). The net effect depends on whether the wage effect or the quantity effect dominates the other. Therefore we cannot unanimously conclude that labr cost is highest because wage rate is highest.