Mar 29 2011

Resource market case study: New York’s manhole covers forged with human sweat and blood…

New York Manhole Covers, Forged Barefoot in India – New York Times

In the revealing story above, the NYT reports on the manufacture of the New York’s thousands of manhole covers, which it turns out come primarily from a foundry in the Indian state of West Bengal. An NYT photographer discovered the Indian factory, and his photos prompted the report here:

Eight thousand miles from Manhattan, barefoot, shirtless, whip-thin men rippled with muscle were forging prosaic pieces of the urban jigsaw puzzle: manhole covers.

Seemingly impervious to the heat from the metal, the workers at one of West Bengal’s many foundries relied on strength and bare hands rather than machinery. Safety precautions were barely in evidence; just a few pairs of eye goggles were seen in use on a recent visit.

In AP Economics, we have begun learning about resource markets, where firms hire the productive resources needed to produce their output. Land, labor, and capital are all needed to produce any output; the combination of these resources a firm will use depends on several factors, including the productivity and the prices of the resources. When the price of labor is low, firms tend to use more labor and less capital. In developing countries, especially those with a large, unskilled workforce (like India), firms are likely to specialize in the production of labor-intensive products, such as the manholes found in American cities like New York.

The scene at the Indian foundry sounds like something from the Middle Ages:

The temperature outside the factory yard was more than 100 degrees on a September visit. Several feet from where the metal was being poured, the area felt like an oven, and the workers were slick with sweat.

Often, sparks flew from pots of the molten metal. In one instance they ignited a worker’s lungi, a skirtlike cloth wrap that is common men’s wear in India. He quickly, reflexively, doused the flames by rubbing the burning part of the cloth against the rest of it with his hand, then continued to cart the metal to a nearby mold.

Once the metal solidified and cooled, workers removed the manhole cover casting from the mold and then, in the last step in the production process, ground and polished the rough edges. Finally, the men stacked the covers and bolted them together for shipping.

Why are New York’s manhole covers being made over 8,000 miles away, anyway? Wouldn’t it make more sense for American cities to buy such items from firms making them right here in the United States? To understand this question, we need to consider the principle of comparative advantage, which says that a nation should specialize in the production of the products for which it has the lowest opportunity costs.

Manhole covers manufactured in India can be anywhere from 20 to 60 percent cheaper than those made in the United States, said Alfred Spada, the editor and publisher of Modern Casting magazine and the spokesman for the American Foundry Society. Workers at foundries in India are paid the equivalent of a few dollars a day, while foundry workers in the United States earn about $25 an hour.

Bengali laborers working in India’s foundries most likely face the trade off of an agrarian existence or maybe another factory job in the pre-industrial economy of the impoverished region, alternatives presenting a much low opportunity cost than American workers whose alternatives include jobs offering much higher productivity. The productivity of a worker depends on the quality and quantity of capital available, the level of training and education of the worker himself. Clearly, Indian workers have less access to capital, lower quality capital, and much less training and education than their American counterparts.

The result is that jobs that require large inputs of low-skilled labor, such as the manufacture of manhole covers, end up being “off-shored” to remote corners of South Asia. The added cost of shipping thousands of ton of iron around the world is more than made up for by the lower resource prices (thus costs of production) in the West Bengali foundries.

Discussion Questions:

  1. Why do the Indian foundries use such large inputs of labor, and relatively little machinery?
  2. What factors might reduce the demand for labor in the Indian foundries?
  3. How does a firm know if it’s using the right combination of capital and labor in its production?

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12 responses so far

12 Responses to “Resource market case study: New York’s manhole covers forged with human sweat and blood…”

  1. kevinyehon 28 Nov 2007 at 9:51 pm

    Yeah, this is pretty ridiculous. I mean morally i guess this is totally wrong considering that we're exploiting cheap labor in India, letting them work in such horrible conditions so that we can live more comfortable lives.

    But i guess from an economic perspective, this is understandable. In India, the less skilled and thus less "productive" workers receive a lower wage rate, which in turn allows the cost of the finished product to be lower. This is actually GOOD for American society.

    It is probably cheaper to use labor in India than to buy expensive capital which would increase efficiency in production. Therefore, these firms find it more profitable to utilize this cheap Indian labor than to invest in capital.

  2. Angel Liuon 28 Nov 2007 at 9:53 pm

    Indian foundries use more capital than labor because the cost of capital is more expensive. Say ten workers' productivity is equivalent to one capital's productivity but the total workers' wages are only about 10% of the cost of the capital. So rational firms chose low-cost labor resource over expensive capital resource. However, if technology improvement lower the cost of machinery and Indian gov't impose a minimum wage, firms might employ more capital. What determines the combination of resources is on the resources' marginal productivity over their cost. A least-cost combination is where MP(labor)/ P(labor) = MP(capital)/ P(capital). A firm who wants to maximize profit with the least cost would consider MRP(labor)/ P(labor)= MRP(capital)/ P(labor).

  3. James Tsaoon 28 Nov 2007 at 11:14 pm

    Well, the foul conditions that these Indian workers work in definitely needs to be improved. Jeez, these men are almost naked and they work with burning hot metal every single day… if any accidents would cause tremendous pain i bet.

    Yet, although the conditions of these factories are bad, the existence of these factories is not only beneficial to the Americans but also to poor Indians despite the poor working conditions. Since the cost of labor is so much lower than that of capital, these factories employ massive labor to achieve the same output. This large input of labor gives Indian men a steady income from the work. So, not only does Americans NEED these factories to produce products at a lower cost, these factories NEED American buyers so its people can get jobs.

  4. KatherineYangon 01 Dec 2007 at 10:46 pm

    Labour is cheap in India, whereas capital is much more costly, therefore, a firm would chose to hire more labour to lower costs. In other words, least-cost production.

    Under that idea, the smart firm would definetly spend more on labour than capital, but humanistically, it's so wrong. But I agree with James, India has a large population and for an Indian firm to use more labour than capital, is definetly beneficial towards Indians as a whole, and to the economy.

  5. Helenon 03 Dec 2007 at 1:07 am

    Because the supply of workforce in India exceeds the demand and because it is largely unskilled, the price of labor, or wage rates, are low. And because the price of labor is so low, firms will naturally use more labor than capital for their optimal combination of resources. The firm will know that it's using the right combination of capital and labor in its production when the marginal revenue product of capital divided by the price of capital is equal to the MRP of labor divided by the price of labor.

    There are several factors that may reduce the demand for labor in the Indian foundries:

    1) If the demand for manhole covers decreased

    2) If the productivity of the workers decreased

    3) If the price of capital (substitute resource) decreased

    4) If the price of goggles (complementary resource – hypothetically, as the article says that these safety precautions are practically nonexistent) increased

  6. kxc.024on 11 Dec 2007 at 2:36 pm

    In regards to the first discussion question, the reason that the firm hired these Indian laborers instead of buying machinery is because the wage is so much cheaper than the money that will be spent on buying a machine. Although it could also be argued that it'd be more profitable for the firm in the long run to buy the machinery because it can produce a lot more of those manhole covers in the same amount of time, the firm was probably only thinking in the short run.

  7. Christinaon 03 Jan 2008 at 1:51 am

    1) The relative cost of the labor to the cost of a machine is much, much lower. Hiring 100 workers who can do x amount of work is probably cheaper than buying a machine that does the same amount of work. Labor is so cheap here that it's just not worth getting the machine.

  8. Alex Goldmanon 05 Jan 2008 at 4:56 pm

    Another reason why using cheap labor is more economical than using machines is that workers can be easily replaced. Machines may break, rust, or be outdated which requires either fixing or the purchase of new machinery. Workers, however, if they grow old or tired can be easily replaced by the huge work force. In the production of manholes, workers seem to be the way to go.

  9. Drew Venkatramanon 04 May 2008 at 6:58 pm

    yes. it is smarter for firms to outsource to india for the production of manholes. However, that being said, the comparative advantage is being met and both countries are prospering the only draw back is that for a firm or industry such and NY manhole covers, couldn't they spend a little more money in order to help out my indian brothers?

  10. Maren Rackebrandton 12 Sep 2008 at 7:21 am

    How the workers, and under what conditions, they work there shouldn't exist today. Those are working conditions from the past and are to me not exceptable during this period of time? Doesn't that have to do something with human rights? Because the work they do there is very dangerous and they do not have the equipment that's neccessary for this job.

    India puts so much income into labor, because it's cheap. The people work for low wages so that the foundries can employ more and more people.

    The demand for labor would be reduced if the quality of the workers would increase or more money would be invested in other resources. Couldn't # 3 be answered with the production possibility curve?

  11. Sam Baronon 03 Apr 2011 at 3:56 pm

    Why do the Indian foundries use such large inputs of labor, and relatively little machinery?

    Its all about cost minimisation and profit maximisation, the ridiculously low wages that this company offers its workers means that they can employ what is probably hundreds for relatively nothing when compared to the cost of employing workers in the USA or buying and operating machinery. Using machinery would drive costs up, cause them to charge a higher price and not increase output enough to be better off when compared to their costs and production levels using workers.

    What factors might reduce the demand for labor in the Indian foundries?

    Two main factors might contribute to a reduction in demand for labour in these foundries, firstly as the article mentiones, there are no better options for these workers, these industrial foundries are the best employment opportunities when you have a family to support and you live in an impoverished area of a developing country. A second factor is the fact that the minimum wage in India is so low that the foundries are able to emply so many people for so little, if the minimum wage was increased by the government, there would be a swift decrease in demand for labour as costs would increase along with wages.

    How does a firm know if it’s using the right combination of capital and labor in its production?

    The right combination of capital and labour should result in the profit maximising output, producing where P=MC

  12. Rupert Notarnicolaon 03 Apr 2012 at 8:54 pm

    sweet thought 6 5 5 8 7 u i e n

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