Labor Cost Impact on Manufacturing: US Companies in Mexico Study

This case study investigates the impact of labor costs on the relocation of American manufacturing companies to Mexico. The study highlights the significant cost differences, with labor costs in America being 12 times higher than in Mexico. This disparity, coupled with free trade agreements like NAFTA,...Read More

Running head: COST OF LABOR IN MANUFACTURING 1
Impact of the cost of labor in manufacturing. A case study of American companies relocating to
Mexico
Name
Institution
Date

COST OF LABOR IN MANUFACTURING 2
Executive summary
The cost of doing business is a concern to many companies today. In recent past, American
companies have been relocating to Mexico citing high cost of labor in the US. Moreover, Mexico
offers free trade agreements where companies can import or export products duty free. The study
aimed to examine the cost of labor in America's manufacturing sector that is pushing some
companies to relocate to Mexico. This research is significant as it will help the authorities
understand cost differences in manufacturing in America. Besides, the research mainly used
secondary data to present its findings. The results shows that the cost of labor in America is 12
times more than it is in Mexico. As such, the study recommends review of NAFTA agreement to
streamline trade between Mexico and America.

COST OF LABOR IN MANUFACTURING 3
TABLE OF CONTENTS
Executive summary.....................................................................................................................................2
1.0 Introduction.........................................................................................................................................4
1.1 Problem statement.............................................................................................................................4
1.2 Research objectives...........................................................................................................................4
1.3 Research questions............................................................................................................................5
1.4 The significance of the research........................................................................................................5
1.5 Purpose of the research......................................................................................................................5
2.0 Literature review.................................................................................................................................5
2.1 Why American manufacturing companies relocating to Mexico.......................................................5
2.2 Differences in the operational cost between America and Mexico....................................................6
3.0 Methodology.........................................................................................................................................6
3.1 Research design.................................................................................................................................6
3.2 Target population...............................................................................................................................6
3.3 Sampling and sample size..................................................................................................................7
3.4 Data collection and analysis..............................................................................................................7
3.5 Validity and Reliability......................................................................................................................7
3.6 Ethical considerations........................................................................................................................7
3.7 Limitations.........................................................................................................................................8
4.0 Results and Discussion........................................................................................................................8
5.0 Conclusion..........................................................................................................................................10
6.0 Recommendation...............................................................................................................................11
7.0 References...........................................................................................................................................12
8.0 Appendices.........................................................................................................................................14

COST OF LABOR IN MANUFACTURING 4
1.0 Introduction
According to Saayman and Middelberg (2014), the cost of labor is an integral part of
manufacturer's production cost and an increase in labor directly affects the productivity and
profitability of a company. In essence, if the cost of production is high, companies tend to earn
less, which reduces their profits. Moreover, labor is vital in the manufacturing sector and its costs
cannot be ignored. Countries like China are enjoying reduced cost of labor that is promoting her
rapid growth (Ceglowski & Golub, 2012). Currently, American companies are relocating to
Mexico while citing the high cost of labor in America.
1.1 Problem statement
America is currently struggling with a wave of companies relocating to Mexico citing the
high cost of labor in the United States (US). Puzzaghera (2016) acknowledge that three main
companies, Brake Parts Inc., Rexnord Corp., and Mondelez International relocated to Mexico
leading to massive job losses. According to Gillespie (2017), more than 800,000 jobs have been
lost from 1997 to 2013. As such, Americans continue losing jobs as companies relocate their
operations. If this trend continues, the unemployment rate will rise in America, which will, in
turn, affect her economy.
1.2 Research objectives
The main objective of this research is to examine the cost of labor in America's
manufacturing sector that is pushing some companies to relocate to Mexico. Moreover, the
specific objective is to find out the differences in labor cost between Mexico and America.
1.3 Research questions
i. Why are the American manufacturing companies relocating to Mexico?
ii. What are the differences in operational cost between America and Mexico?

COST OF LABOR IN MANUFACTURING 5
iii. What can be done to prevent more job losses through relocation of American companies
to other countries?
1.4 The significance of the research
This study is very important as it will help labor organizations and the government
understand the reasons pushing companies out of the US. Moreover, it will help the government
adjust their labor policies to prevent further job losses.
1.5 Purpose of the research
This research will examines the current wage rate of the US compared to that of Mexico.
This will help reveal reasons why companies prefer to relocate to Mexico instead of just
continuing to manufacture in America.
2.0 Literature review
2.1 Why American manufacturing companies relocating to Mexico
Consistent with Gillespie (2017), companies relocate their manufacturing to Mexico to
remain competitive globally by creating cost advantages without compromising on quality,
increase profits, and to sell to other Mexicans. Besides, Mexico has a low-cost workforce,
companies relocate to control the spiraling increase in workers compensation premiums as well
as employ from highly concentrated English speakers. Additionally, companies want to save on
other costs such as duty through the North America Free Trade Agreement (NAFTA) that enable
expanded market. Additionally, Mexico has duty free trade agreements supplying to over 45
countries with a maximum of five documents to either import or export. Furthermore, Mexico is
close to the US and thus there is less transit time and easy access.

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2.2 Differences in the operational cost between America and Mexico
The current daily wage rate in Mexico is $4.7 inclusive of benefits whereas that of the US
is above $7.25 plus other benefits (Black, 2017). As such, companies relocate to Mexico to take
the advantage of reduced rates in addition to enjoying reasonable building lease rates in modern
industrial parks.
3.0 Methodology
3.1 Research design
This sudy adopted quantitative research design. Besides the strategy used is survey
method as supported by Saunders, Lewis, and Thornhill (2016). The scholars argue that surveys
are the most appropriate strategy to obtain specific information from a variety of available
information.
3.2 Target population
The target population for this research are companies that have relocated to Mexico. The
decision to choose the companies was supported by Sekaran and Bougie (2016) findings that
found out that data from different settings concerning the same subject allows comparisons.
Moreover, these companies cite reasons for their relocation which was vital for this study.
3.3 Sampling and sample size
The research used purposive sampling to select companies that participated in the
research. Intrinsically, purposive sampling allow the researchers to choose samples based on
unique characteristics (Saunders, Lewis, & Thornhill, 2016). The researcher gathered data on
wage rate from the US companies and what they expect to pay in Mexico.

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3.4 Data collection and analysis
The data were collected from secondary sources, analyzed using MS Excel, and finally
presented using pie charts, tables, and discussion.
3.5 Validity and Reliability
A research validity is an extent to which a study achieves its goals by getting the intended
results (Saunders, Lewis, & Thornhill, 2016). The researcher followed quantitative approaches to
obtain secondary data and presentation of results. Additionally, the researcher adhered to the
objectives of the study and thus did not deviate. On the other hand, Saunders, Lewis, and
Thornhill (2016) observe that the ability of other researchers to use a study measures its
reliability. It shows that the researcher carried out the study following applicable guidelines. The
researcher followed the principles of research methods in carrying out the literature search,
methodology and compiling the overall report that other scholars can relate with.
3.6 Ethical considerations
When carrying out a research, ethics plays a significant role in ensuring the authenticity
of the study (Mollet, 2011). The researcher followed the principles of research methods, by
ensuring that all the information retrieved from various organizations were used for the purpose
of this study only.
3.7 Limitations
Carrying out this study required a substantial amount of time and resources. As such, it
took a lot of time to compile and present. Balancing lessons, assignments, and carrying out this
study was quite a challenge. Additionally, the researcher found different data on the same topic
and selecting the right ones took much time.

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4.0 Results and Discussion
Even with the relocation threat by companies to Mexico, Gould (2018) predicts that the
average American wage rate is on the increasing trend. This may worsen the situation further if
Mexican wage rate does not grow at the same rate. On the other hand, the government adjusted
minimum wage rate for Mexicans from $4.25 to $4.70 per day (Gillespie, 2017) whereas the
minimum wage rate per hour in the US is $7.25 or $58 working 8 hours a day. The number of
working hours in America per day is 8 hours. This means when an American worker pockets $58
(7.25*8) and a Mexican worker pockets $4.7, a difference of $53.8. Other minimum wages in the
US are as follows.
Hourly minimum wages per state as of January 2018
State Minimum wage in $
Pennsylvania 7.25
Delaware 8.25
Arkansas 8.50
Nebraska 9.00
Kentucky 7.25
Colorado 10.20
New York 10.40
Hawaii 10.10
Illinois 8.25
Alaska 9.84
Arizona 10.50

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Massachusetts 11.00
California 11.00
Washington 11.50
Source: National Conference of State Legislature (NCSL), (2018)
With NAFTA agreement still in operations, companies will continue moving to Mexico
to save $53.8 per day. Intrinsically, companies manufacturing in America pay 12 times more
than what their Mexican counterparts pay. Furthermore, in California, the minimum daily wage
rate is $88.00 which is 18 times that of Mexico. In such a circumstance, Black (2017) observes
that companies can save close to $20,000 annually when they manufacture in Mexico compared
to America.
The pie chart below shows the disparity in wage rate between Mexico and the US
Mexico
7%
America
93%
Daily Wage rate between America and
Mexico
Mexico America
Mexico continues to attract American companies because of low wage rate. Gillespie
(2017) reports that between 1997 and 2013, an estimated 800,000 Americans have lost their jobs

COST OF LABOR IN MANUFACTURING
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to Mexican counterparts. Besides, Trading Economics (2018) reports that the unemployment rate
in Mexico stands at 3.2% whereas that of America is at 4.1%. This signifies that as the
unemployment rate in Mexico is lower than that of the US. As such, the relocation of companies
to Mexico hurts the American economy more.
5.0 Conclusion
The cost of production is very vital in the sustainability of a business venture. Companies
are constantly looking into ways of cutting costs. As such, wage rate is one of the avenues of
cost-cutting. Due to the high cost of production in the US, companies are relocating their
manufacturing to Mexico that has a lower wage rate. Ideally, Mexico offers a minimum wage
rate of $4.7 per day compared to $7.25 in America per hour. And with the NAFTA agreement
still in place, the US will continue losing on job opportunities to Mexico. Besides, due to rising
competition and globalization, Americans may lose more jobs to Mexicans in the long run.
6.0 Recommendation
For the US companies to survive in the long run, there is need to adjust the NAFTA
agreement to balance the wage rate between the two countries. Additionally, Mexico should
adjust their wage rates upwards to balance the disparities between the two countries. Another
recommendation is that the US government to offer tax incentives on exportation to help retain
more companies in America.

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7.0 References
Black, T. (2017). Even a Nafta Collapse Won’t Keep Companies from Moving to Mexico.
Bloomberg. Retrieved on April 16, 2018 from:
https://www.bloomberg.com/news/articles/2017-10-24/mexico-s-2-50-an-hour-wages-
lure-jobs-south-amid-nafta-talks
Bureau of Labor Statistics, 2018. REAL EARNINGS–MARCH 2018. Retrieved on April 16,
2018 from: https://www.bls.gov/news.release/pdf/realer.pdf
Ceglowski, J., & Golub, S. S. (2012). Does China still have a labor cost advantage?. Global
Economy Journal, 12(3).
Gillespie, P. (2017). Mexico to raise minimum wage...to $4.70 a day. CNN. Retrieved on April
16, 2018 from: http://money.cnn.com/2017/11/22/news/economy/mexico-minimum-
wage/index.html

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Gould, E. (2018). The State of American Wages 2017. Economic Policy Institute. Retrieved on
April 16, 2018 from: https://www.epi.org/publication/the-state-of-american-wages-2017-
wages-have-finally-recovered-from-the-blow-of-the-great-recession-but-are-still-
growing-too-slowly-and-unequally/
Governing, (2017). Median Wages by State. Retrieved on April 16, 2018 from:
http://www.governing.com/gov-data/wage-average-median-pay-data-for-states.html
Mollet, J. (2011). Ethical issues in social science research in developing countries: Useful or
symbolic. In Transmission of academic values in Asian Studies workshop (2009:
Australian National University, Canberra, ACT). The Australia-Netherlands Research
Collaboration (ANRC).
NCSL, (2018). State Minimum Wages | 2018 Minimum Wage by State. NCSL. Retrieved on
April 16, 2018 from: http://www.ncsl.org/research/labor-and-employment/state-
minimum-wage-chart.aspx
Puzzanghera, J. (2016). These three U.S. companies moved jobs to Mexico. Here's why. Los
Angeles Times. Retrieved on April 16, 2018 from: http://www.latimes.com/business/la-
fi-mexico-jobs-20161212-story.html
Sekaran, U., & Bougie, R. (2016). Research methods for business: A skill building approach.
John Wiley & Sons.
Saayman, L., & Middelberg, S. L. (2014). The effect of higher wages on production cost and
mechanization: a South African maize sector study. Journal of Applied Business
Research, 30(2), 341.

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Saunders, M., Lewis, P. & Thornhill, A. (2016). Research methods for business students. 1st ed.
Harlow (Essex): Pearson.
Trading Economics, (2018). Mexico Labor Costs. Retrieved on April 16, 2018 from:
https://tradingeconomics.com/mexico/labour-costs
8.0 Appendices
Appendix A,
Average hourly wage rate in 2018

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Source: Bureau of Labor Statistics (2018)
Appendix B

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The table below show highest median hourly wages for all occupations as of May 2016.
State Wage in $
Hawaii 19.24
Minnesota 19.28
California 19.67
New jersey 20.17
New York 20.56
Maryland 20.68
Washington 20.87
Connecticut 21.68
Massachusetts 22.45
Alaska 22.68
Source: Governing (2017)