Question

Consider a firm that uses both Canadian labour and foreign labour in its multinational operations. Would an increase in foreign wages necessarily increase the demand for Canadian labour? Explain.

Answer 1

According to the basic theory of the labor market, there ought to be one equilibrium wage rate that applies to all workers across industries and countries. Of course this is not the case; doctors typically make more per hour than retail clerks, and workers in the United States typically earn a higher wage than workers in India. These wage differences are called compensation differentials and can be explained by many factors, such as differences in the skills of the workers, the country or geographical area in which jobs are performed, or the characteristics of the jobs themselves.

If the foreign labours are highly skilled then the demand for Canadian labour will not increase. Otherwise, normally companies prefer lower wages to reduce their operational costs. So automatically demand for Canadian labour would have been increased.