Back in February, Trump threatened that as president he would offer Carrier the choice of keeping its factories in the United States, or else subject itself to a tariff on air conditioners imported from Mexico. “I’m going to tell them, ‘Now I’m going to get consensus from Congress and we’re going to tax you.’” This protectionist reaction ignores the underlying reasons that likely are driving Carrier’s decision.
A more constructive approach would be to improve the U.S. business climate by reforming policies that create unnecessary burdens for companies.
Carrier’s official statement regarding the relocation says that it is due to “ongoing cost and pricing pressures driven, in part, by new regulatory requirements.” Although the statement does not mention the difference in wage rates, lower hourly costs in Mexico may have played a role. Carrier’s expenses for employee salary and benefits average about $34 per hour in Indiana, while those costs in Mexico are only about $6 per hour.
However, much of that differential likely would be offset by lower productivity (less output per hour worked) in Mexico than in the United States. Data compiled by The Conference Board indicates that the value of output generated per hour by the average U.S. worker in 2016 is 3.2 times greater than for the average Mexican worker ($67 vs. $21 per hour). Interestingly, that gap has widened significantly since NAFTA was implemented in 1994. Then the average U.S. worker generated $48 of output per hour (adjusted to 2015 U.S. dollars) while the average Mexican produced $19. Productivity gains have boosted the value generated by an hour worked in the United States by 40% over 22 years, while in Mexico the gain has been only 10.5%.