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The Impact of Globalization on Labor Wage Costs

Updated on October 29, 2017

Substantial evidence exists that shows how globalization and labor wage costs are linked. There are various factors that affect variation in labor costs globally. This article will illustrate how differences in exchange rates, productivity, turnover, and other risk factors affect labor wage costs. Additionally, labor wage costs will be analyzed from an in-depth look at China’s wage labor market.

It is important to consider the effect that exchange rates, productivity, and turnover have on labor costs. With more and more companies choosing to expand their operations overseas, they must take into account exchange rates. In order for firms to be able to predict future exchange rates, they can obtain information from investment and consulting firms. Companies could look at the International Monetary Fund and its World Economic Outlook Database. According to the United States Department of Commerce website, these are all valid ways for a firm to monitor changes in exchange rates. Additionally, labor costs link the relationship between wages and productivity. Unit labor costs measure the labor costs for producing one unit of output. If wages increase faster than productivity, unit labor costs will also increase. If firms chose to expand their business overseas, then they must consider how level of productivity affects labor costs. An article by Arthur Neef and Christopher Kask titled, “Manufacturing Productivity and Labor Costs in 14 Economies,” showed the labor costs in the United States compared to other countries. Their findings concluded that labor productivity rose about 2.5% in the United States, which fell mid-range compared to the other thirteen countries. Since different countries have different rates of growth in labor productivity, firms must consider globalization on a per-country level.

Finally, a firm must consider turnover. When moving production overseas, a firm may be uncertain if they will be able to retain workers and maintain low employee turnover. Sometimes a company may have to wage raises higher than expected in order to keep employee turnover low. This requires firms to train employees, which also increases costs. According to a study conducted by Hay Group, India’s employee turnover rate reached 26.9% in 2013, while the United States’ employee turnover rate was only 20.3% during 2013. This difference in turnover exemplifies how firms must consider employee turnover if they choose to globalize, as this could have a large impact on labor costs. Not only are explicit costs of re-training an employee and higher wage costs involved, but implicit costs also exist. The cost of time must also be considered. For instance, managers have to spend the time looking for new employees, training them, and staying up to date on changing foreign policies in the workplace. As a result, all of these physical and implicit costs could result in reduced quality, productivity, and higher employee overtime costs.

Finally, we will consider the effect of globalization on China’s economy. China has become a large manufacturing powerhouse for overseas business. However, there has been some recent concern, as hourly wages have increased 12% on average per year, according to an article in The Economist, “A Tightening Grip.” Still, China has seen an increase in firms choosing to set up their manufacturing plants. This has made the market more competitive for future investing. Although employee turnover is rising, other costs such as the cost of shipping and taxes are lower, which balances out the costs. China remains an attractive option for companies looking to globalize due to its cheap factory costs. Most factory workers are paid just above minimum wage, and their efficiency is generally higher than other countries. However, firms must also consider the current situation in China. There has been a decrease in Chinese citizens moving from the country to the city. Additionally, there are less Chinese citizens who are willing to work in the same conditions as their elders. Moreover, there have been countless strikes in China over the past ten years. China is a prime example of the various factors that a firm must consider when deciding if and where to globalize their business.

It is evident that many factors must be taken into account when a firm is choosing to expand overseas. Globalization involves many different aspects that could positively or negatively affect a company’s profits. For example, firms must consider how exchange rates, labor productivity, and employee turnover will affect labor costs. Only after weighing all of the costs and benefits should a firm choose if expanding their operations overseas will pay off.

© 2017 Kali Slavinski

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