Apple and Exchange Rates

Over at The Economic Policy Institute Blog, Josh Bivens thinks something is missing in the big New York Times story on why Apple makes stuff in China instead of America:

Yes, I’m gettingboring on this topic, but, exchange rates are by far the single most important determinant of U.S. trade performance, so if the question is “why isn’t X made in the US anymore,” it’s very likely that the answer remains “the dollar is overvalued.”

The main point of the New York Times story was that differences in hourly wages are not the primary driver of Apple’s production in China, but rather the available scale, flexibility, supply chain, and the quantity of appropriate labor available. Given that they are specifically countering the notion that wage differences are the issue, it seems quite besides the point to reply that the determinants of wage differences are being ignored.

Something we learn from the article is that you should think of Apple’s decision in terms of the labor supply curve for the type of labor they want. It is highly concentrated, medium skilled workers that can scale up extremely quickly. This means they don’t just have to consider the point where they expect their labor demand curve to cross the labor supply curve, but also how quickly the supply curve slopes upward just to the right of equilibrium, since their costs will be determined by average wages along a section of the supply curve.  That is to say the shape of the short run labor supply curve matters a lot.

One advantage in China seems to be that it is much cheaper to move quickly along the supply curve. Huge supplies of flexible labor like that don’t exist in the U.S. without offering enough pay to lure them from all over the country. In fact laws here prevent the sort of flexibility you can get in China. This means that when you scale up labor quickly in the U.S., increasing the number of workers must take up relatively more of the slack than increasing worker hours hours. Their labor supply curve is much flatter where they need it to be, and exchange rates aren’t going to flatten the labor supply curve in America.