Factors of Production

Labor

For most industries, labor is the most important determinant of location, especially at the regional, national, and global scales. When firms make location decisions, they often begin by examining the geography of labor availability, productivity, and skills. The degree to which firms rely on labor, however, varies considerably among different sectors of the economy and even among different firms, which may adopt different production techniques.

The relative importance of labor varies considerably among industries. The demand for labor depends on the size of the firm involved and how labor intensive or capital intensive a given production process is as well as the cost. In very capital-intensive industries (e.g., petroleum), labor costs may be irrelevant. Thus, it is a mistake, but a common one, to assume that all industries seek out low-cost labor. Over time, most industries have become increasingly capital intensive; that is, they have substituted capital for labor, particularly when production in large quantities justifies the investments involved.

The supply of labor in a given region greatly affects the cost. In countries with high birth rates, the supply tends to be relatively high and labor costs are low. In economically advanced countries, the birth rate is low and labor is relatively expensive. Because some firms demand particular types of workers in terms of their age and/or sex, the demographic structure of a region also shapes the supply of certain types of employees (e.g., teenagers). Finally, because labor is mobile over space (but not perfectly so), migration (or immigration if international) also shapes the supply of labor. In regions that can attract labor easily, wage rates will tend to be low, all else held constant. When the supply is limited by, say, immigration restrictions, wage rates tend to go up. At the local level, housing costs also can constrain the supply of labor if they are so high that workers cannot find affordable places to live.

Under capitalism, the real cost of labor is determined by the relative productivity of labor rather than the cost of wages and fringe benefits. Thus, cost is hardly the only factor considering labor. Productivity is largely a function of the skills present in the local labor force (or human capital) that, in turn, are derived from formal and informal educational systems, on-the-job[Page 152] training, and years of experience. Firms will pay relatively high wages for skilled productive labor. Consider that if labor costs were central to the location of all firms, very low-wage countries, such as Mozambique, should attract vast quantities of capital—which they do not—and high-wage countries, such as Germany and the United States, should see a rapid exodus of jobs. The reality of the geography of labor is much more complex and involves labor markets in which jobs are constantly created and destroyed, skills are produced/reproduced and change, new technologies come into play, and other cultural, economic, and social forces can be important factors.

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