Economics Worksheet With Answers - 2011 Page 6

6. Suppose that the U.S. government required U.S. firms to pay a “living wage” to workers in its

subsidiaries or contracting firms in developing countries.

a. What are the likely consequences of this requirement?

Wages will most likely rise and employment will fall.

b. How would one determine a living wage?

Presumably, a living wage is somewhat higher than the current market equilibrium wage.

However, it is difficult to determine how much higher. If set equal to U.S. average wages,

then firms are likely to close and employment will fall dramatically. It is also difficult to

compare living standards across countries. What U.S. workers consider a living wage may

allow them to own several automobiles, live in large homes, and avail themselves of the

latest technological gadgets. The U.S. living wage is inappropriate for developing countries

that find their comparative advantage in labor-intensive products where wages are expected

to be lower.

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