The Effect of Labor Cost Differences on the Location of Economic Activity under the U.S.-Canada Free Trade Agreement

The purpose of this article is to compare compensation costs for Canadian and U.S. workers to evaluate how relative compensation costs may affect firm location decisions with the implementation of the Free Trade Agreement. Using data from the Bureau of Labor Statistics and the Labour Division of Statistics Canada, the major findings were that compensation costs for U.S. labor were consistently higher than for Canadian labor; and, that despite apparent Canadian preferences for social insurance, U.S. nonwage compensation was also higher. Higher U.S. costs persisted after allowing for large shifts in the exchange rate except in retail trade. When differences in labor productivity were incorporated, the Canadian cost advantage disappeared except in wholesale trade. Major conclusions were that cost differences will motivate firms to locate distribution centers on the Canadian side of the border; and, that socialization of medical costs in Canada will increase pressure for restructuring financing of health insurance in the United States.