Differences in productivity are usually the major force behind differences in wages and unit labor costs. Suppose that a single unskilled worker at a pottery factory in Mexico can produce 1 mug per hour. By comparison, suppose that a single unskilled worker at a pottery factory in the United States can produce 14 mugs per hour because more and better machinery generates higher labor productivity. The Mexican mugs and the American mugs are identical in quality and durability and sell for the same price.

a. If unskilled pottery workers are paid the local minimum wage in both countries, how much is the labor cost per mug for mugs produced in Mexico? For mugs produced in the United States? (Use the minimum wages from Problem 1 and make all calculations in dollars.)

b. With regard to mug production, how much higher are labor costs per hour in the United States?

c. With regard to mug production, how much higher are labor costs per unit in Mexico?

d. Do higher labor costs per hour always imply higher labor costs per unit?

e. If firms with lower labor costs per unit expand while those with higher labor costs per unit contract, in which country will mug-making firms be increasing in size and hiring more employees? If unskilled pottery workers relocate to where they can find jobs, to which country will they be moving?