Reference no: EM1312145

A labour analyst once argued:

If you worked 2,000 hours last year at a wage of $10 per hour and produced 10,000 units of output, your output per hour is 5 units - total output divided by total hours worked. If you average six units an hour this year, your productivity (output per hour) has increased twenty percent. Assuming the unit price is $7.50, the same as last year, and you still get paid $10 per hour, your employer's labour cost per unit has decreased from $2 to $1.67 per unit. He gets added profits on each unit, so he can afford to share extra profits with his workers.

Let's put specific numbers to the scenario described above. Assume the firm's initial investment in capital is $50,000 and the cost of the investment is 10% each year. Material costs are $5 per unit, and the labour cost is $2 per unit when producing 10,000 units at 5 units per hour. If the firm invests a new technology, suppose the capital investment is $70,000 with the same cost of capital. The firm now pays $5.25 per unit because the supplier of these materials is doing more finishing work thereby reducing the labour requirements for assembly. In this case, labour costs are $1.67 per unit and 12,000 units are produced. The price per unit remains $7.50 in both scenarios. Does the labour analyst's argument hold? Explain why or why not, and use data to prove your point. (Hint: calculate total costs in both circumstances).