The Mexican Pizza Riddle

Discussions on the Economics of Poverty
Part 1. The Mexican Pizza
Eyler Coates
    This is a description of what has been called "The Mexican Pizza Riddle." I am proposing it and the theories resulting from it as a partial explanation of Third World poverty as well as a partial explanation for our own prosperity in the USA.

    I lived in Mexico for a year back in the '80's, and while there, I was able to buy a medium-size pizza for about $3. The same pizza in the U.S. cost about $6. In Mexico, the pizza maker who produces a $3 pizza makes about $1 per hour of less. In America, the pizza maker who produces a $6 pizza makes about $6 per hour. In other words, the Mexican pizza worker earns about ONE-THIRD the cost of the pizza, whereas the American pizza worker earns the FULL cost of the pizza. This differential between wages and prices seemed to prevail throughout the Mexican economy. Therefore, the Mexican worker/consumer has one third the buying power of the American worker/consumer. Another good reason for calling Mexico a "THIRD" World country! But consumers must earn money in order to buy the products of industry, and the Mexican worker apparently is not earning enough to support a flourishing economy.
Don Dale
    Your calculations are not quite correct; you forgot to factor in the productivity of labor, or, in your example, the number of pizzas that a worker is able to make per unit time. Your example assumes that each worker is only able to make one pizza per hour, though your arithmetic holds so long as the American and Mexican workers are equally productive (measured in pizzas per unit time).
Eyler Coates
    My example does NOT assume that each worker makes one pizza per hour. It DOES assume that each worker's output is approximately the same. This is admittedly a rough assumption, and to make a precise comparison would require such detailed study as to be impracticable for purposes of a mere discussion. But reasonable people can discuss such a subject, even if the terms are approximate, especially when we are talking about gross discrepancies.
Don Dale
    But they are not. The United States has the most productive labor force in the world. This is due partly to the comparably high levels of education received by most US residents, and partly to the fact that the American worker has access to much more capital -- machines that enable him to produce more per unit time. To abuse your example, the American pizza maker has an automatic pepperoni slicer, a dough making machine, and an oven which bakes every pizza perfectly. Meanwhile, the Mexican pizza maker must slice his pepperoni and knead his dough by hand, and has an unpredictable oven which turns every other pizza into an inedible charred mass.
Eyler Coates
    This exaggerates the differences in productivity. The Mexicans do not live in the Stone Ages. They have modern appearing ovens, and other modern appliances. I must remind you that I lived in Mexico and ate pizza perhaps once per week for a year. To suggest that every other pizza came out an inedible charred mass is utterly absurd. Their pizzas were, BTW, every bit as good as the best in America. Anyone who has been to the interior of Mexico knows that the quality of their foods is excellent. Their beers are far better than anything you can buy in the U.S. And don't judge their beers there by imported Mexican beer in this country. I think they change the formula to suit American tastes (or the lack thereof). Mexican workers in Mexico are, to my observation, as good and competent as those anywhere.

    But if you think productivity explains everything, please explain this: When U. S. plants move to the Maquiladora, do they suddenly become 1/3 as productive? Because they do pay their laborers in Mexico even less than 1/3 the comparable wage in this country by any way you want to figure it. No, obviously the productivity of a plant has nothing to do with the wages that plant pays.
Don Dale
    It's not the productivity of a plant that determines wages, it's the marginal productivity of labor in the plant.
Jim in Boulder
    E.C. has committed a number of flaws already. First of all, you are comparing the price of pizzas in Mexico and the US in dollars, but Mexico does things in pesos. What are you using to convert pesos into $, the exchange rate? If so, there is no guarantee that your figures are reliable, since pizzas are not internationally traded. Only goods that are are likely to have a real value, then, can be compared via the exchange rate.
Eyler Coates
    Exchange rates and internationally traded pizzas are entirely irrelevant to the point I am making. In fact, that is what makes my point so potent. I am talking about the RATIO between wage and price in two countries: Mexico and the United States. It doesn't matter what the exchange rate is. My reference to prices as determined by the exchange rate is merely for illustrative purposes, i.e., to give it a human face.
Jim in Boulder
    Second, and worse, you have based your theory on purely anecdotal evidence.
Eyler Coates
    Another irrelevancy. In the first place, it is not anecdotal evidence. Anecdotal evidence is evidence derived from a single incident that may or may not have generalized meaning. I ate pizza all over Mexico, and for similar establishments, the price was generally the same. Moreover, I use pizza just as a focal point. Everyone who has been to Mexico knows that everything down there is cheap. Pizza is an ideal example, because the process of making it is essentially the same in both the U.S. and Mexico.
Jim in Boulder
    There is nothing in the term "anecdotal" that implies a single observation. I may know one or ten people who got pregnant so that they could recieve more welfare benefits, but that would still be anecdotal evidence that people in large numbers are getting pregnant for this reason.

    Furthermore, in your statement that everyone who has been to Mexico knows how cheap everything is, you now are using a comparison in which my earlier (and then misplaced) critique of comparing currencies applies.

    Third, you have left productivity out of the picture altogether. Sure, the American gets a pizza per hour as her wage while the Mexican only gets a third of one for his wage, but if she makes 3 pizzas an hour and he only makes one, then their share of the profit is equal, and the wage differential comes not from the greed of his boss or the generosity of her's, but from whatever is producing the productivity differential.
Eyler Coates
    Your point would be significant except for this: the technology for making pizza in both countries is not significantly different. Certainly, the American pizza maker is apt to be more efficient by a small factor. A reasonable estimate might be 25% at the high end. But we are talking about a factor of 3! If the $3 Mexican pizza maker had earned $2.25 per hour, we wouldn't be discussing this topic. But she makes 1/3 the cost! The figures are so grossly out of balance, that productivity cannot offer an adequate explanation for the difference. Your assumption that the American could make three times as many pizzas as the Mexican is totally out of the realm of reality.
Matthew B. Kennel
    Indeed. In California, many of the pizza makers are of Mexican origin.
John B. O'Donnell
    Quite a few are even Mexican Nationals. So?
Eyler Coates
    Another salient point: Mexicans come here and make decent wages. What happens when they cross the border? Do they suddenly become educated, more productive, etc.? No, what happens is they enter into a economic system more congenial to their well being.
Jim in Boulder
    I am not saying that, all other things being constant, a Mexican can only make 1/3 as many pizzas as an American, but that perhaps the average Mexican IS only making 1/3 as many. I.e., that US pizza joints are just busier, and that unless you believe that pizzas are made in a context of strictly constant returns to scale, this alone could account for a lot.
Eyler Coates
    Moreover, the relationship which I describe prevails throughout the Mexican economy. I paid a Mexican medical specialist $10 (very good doctor), with which he could buy three pizzas, whereas the American specialist can buy ten to twenty pizzas with what you pay him for the same office visit with examination. Again, roughly three times as much at a minimum. Are you saying that the American specialist is three times more efficient/productive as the Mexican specialist? Doesn't make sense.
Matthew B. Kennel
    Of course not. The reality must be, of course, is that there is a huge supply of even more desperate Mexican workers who are willing to work just as hard at equally or lesser paying jobs. I bet the average Mexican pizza maker would give the same answer too.

    Now, the potent question becomes, "Why is that?"

    I think historians come closer to finding, and more importantly caring about, some sort of truth.
Jim in Boulder
    I would not say that productivity explains everything. Certainly the AMA has done everything that it could to prop up doctor's incomes. I certainly don't believe in a perfectly functioning labor market. However, I think that if you want to help people in Mexico, the way to go is to help unions form. This was one of your major points and I agreed with it. But I disagree with the government having anything to do with setting labor's share of production. They don't have the information needed to do so, are too vulnerable to corruption, and won't be the ones to directly face the consequences of being wrong. Unions are closer to the problem, and if they demand too much or too little, then it's their necks in the noose. If you must get the government involved, one way that I would go along with is to have them carry out redistributions of wealth and income, such as free education and welfare.
Eric Fruits
    The Mexican pizza-maker has a marginal revenue product (change in total revenues for a change in amount of labor) of $1 per hour whereas the American pizza-maker has a marginal revenue product of $6 per hour.
Eyler Coates
    Surely the MRP is greater than the payout in labor costs, else why bother? But besides that, the point is obvious, isn't it? The real question is, Why this difference? Especially, why the different ratio to the cost of the product?

    When in Mazatlan, I had a huge (living room 20' x 20') ocean front furnished apt. with balcony, maid and utilities for about $230 per month. Terrific, yes? Especially if you can make your income in the U.S. (which I did through investments) and spend it in Mexico. Si, senor. Quiero! But unfortunately for the Mexican, he had to earn his income in Mexico. If he were a "rich" capitalist like me, he would be OK. But if he worked for a living, he earned the equivalent of maybe $1 per hour where in the States he might earn $6. So, even though prices in Mexico were often one-half what they are in the U.S., the cost of living for the Mexican COMPARED TO HIS WAGE EARNINGS, WAS THREE TIMES WHAT IT IS IN THE U.S.!!

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