chapter 5: returning to labor, capital, land & technical skills how important are these factors...

Chapter 5: returning to labor, capital, land & technical skills

• How important are these factors in the cost of production?

• What are key variations spatially• How does scale affect our view of these

issues?• Going beyond the text: the issues raised in

this chapter are fundamental to consideration of economic activity for the rest of the quarter

Labor

How important is labor as a location factor for manufacturers?

Lloyd & Dicken – my old textbook: Production workers 25% of value added, All labor 46% of value added

What is value added?

Value added = value of shipments - cost of goods sold

An Example of Value Added: Margi Beyers Pizza/Bread Stone

Wholesale: $16.

Less:

Cost of clay $ 4

Cost of glaze $ 1

Cost of energy $ 2.50

Other overhead (labels) .50

Transport Cost (Raw Material

+ Delivery .50

Capital Charges (kiln, equipment) 1.00

Subtotal $9.50

Value Added $16 - $9.50 $6.50

Wages/VA

0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45

Petroleum and coal products

Beverage and tobacco products

Chemical

Food

Paper

Primary metal

Computer and electronic products

Nonmetallic mineral products

Textile product mills

Miscellaneous

Electrical equipment, appliance, and component

Apparel

Transportation equipment

Plastics and rubber products

Textile mills

Machinery

Leather and allied products

Fabricated metal products

Furniture and related products

Wood products

Printing and related support activities

Wages/VA

Wages per dollarof value added

Average = .26

Wages/Shipments

0 0.05 0.1 0.15 0.2 0.25 0.3




Miscellaneous


Apparel

Wood products

Machinery




Textile mills



Paper


Primary metal

Food

Chemical



Wages/Shipments

Wages per dollarof shipment

Average = 12%

Production/Total

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

Textile mills

Wood products

Primary metal





Paper

Apparel


Food






Machinery

Miscellaneous


Chemical


Production/Total

Production workers asa proportion of total Employment

Average = 71%

Labor Costs among regions Production work pay/hour $6.68 to $12.34 in 1983

In 1997 - Low $9.96 South Dakota

- Mean $13.17

- High $17.17 Michigan

• Classic view of wage rate equilibrium:$

QAQB

D

DS

SWA

S

S

D

D

WB

In 2011Low $18.13In Mississippi

High $35.45In D.C., $28.24 in Connecticut

United States (AK & HI Inset)by Column B

17.9 to 25.3 (12)15 to 17.9 (10)

9.9 to 15 (8)8.1 to 9.9 (9)3.2 to 8.1 (12)

1999 Percent Union Members

U.S. Average = 13.9% of Wage & Salary Workers

** *

*

*

**

*

**

**

*

*

**

*

**

* *

* Right towork states

Evidence on Regional Wage Rate Convergence

•Historic movement of blacks from the South to the Industrial North

•Mexican migration into the U.S. today

•Internal movement in the U.S.: job pull

for $?

• Producers ability to move capacity to cheap labor - U.S. shoes, textiles

Social, Environmental

Weber’s Analysis of Low Cost Labor

M1

M2

M3

C

L

W

At W labor costs are $5 per unit output below LIsodapanes - contours of transport cost increase away from L

1 2.5

4

5

Critical Isodapane -Tr. Cost = Labor CostDifferential

Hong Kong Employment Trends

0

200

400

600

800

1000

1200

Job

s in

Th

ou

san

ds

Mining & quarrying

Manufacturing

Electricity & Gas

Construction Sites

Wholesale & retail

Transport, Storage,Communications

F.I.R.E. & BusinessServices

Community & SocialServices

Public Sector

Unionization Rates & Labor Cost Differences

A falling percentage over time:

1983 20.1%

1991 16.1%

1999 13.9%

2007 12.1%

Wage Rates above Non-Union

2006 $23.33 per hour - union

2006 $18.53/week - nonunion

Labor Costs Versus Labor Productivity/Skill as a Factor in Regional Development

Washington State Investment In Human Capital Study

% of companies dissatisfied with employee skills:

(1) Basic- ca. 35%; communication ca. 40%, problem-

solving 48%, work habits - 42%

(2) Educational - difficulty in finding employees:

basic skills below high school: 38%, high school 56%,

job related specialized skills 86%, liberal arts degree 59%,

advanced degree 67%.

(3) Key needs - in Training Programs, and in types of

training provided.

Local Examples of Labor Force Programs

•Washington State Workforce Board

• Puget Sound Regional Council Prosperity Partnership

• WorkSource Oregon

•Idaho Workforce Development Training Program

Geographer’s New Views of Labor and Regional Advantage

• Storper’s vision of “untraded interdependencies” as regional assets

• Economic Sociology:

- Institutionalism; embeddedness; structure and social reproduction; networks; other key factors?

Thomas Friedman – NYT Reporter

• Advocate of globalization, but also the need for labor force development here in the U.S. in the face of this trend

• His recent book was on the NYT best-seller list

• He editorialize for support for an ex-M.I.T. president-headed report called “Rising Above the Gathering Storm.”

Link: www.nationalacademies.org

Friedman’s Ten Flatteners:•Outsourcing•Offshoring•Open- Sourcing•Insourcing•Supply Chaining•In-forming (search engines)•The Internet•Fall of the Berlin Wall•Netscape’s Public Offering•Work Flow Software•The Steroids (Digital, Mobile, Personal and Virtual)

He argues together they have allowed unparalleled collaboration

Friedman Concludes about the U.S.: “The flattening of the world is moving ahead apace, and barring war or some catastrophic terrorist event, nothing is going to stop it. But what can happen is a decline in our standard of living, if more Americans are not empowered and educated to participate in a world where all the knowledge centers are being connected. We have within our society all the ingredients for American individuals to thrive in this world, but if we squander those ingredients, we will stagnate.” (Friedman 2005, pp. 305-306).

• Clearly, offshoring business services is intimately tied to

other ongoing forms of restructuring• It provides challenges and opportunities for advanced

economies as well as developing countries• There are significant research opportunities• There are also many policy challenges

Capital Sources: Startup versus Later in Firm LifeStartup: Personal Sources, “mattress money,” “Business Angels,” Venture capital, IPO’s, and business loans

After Startup: Internal retention of profit, (further) stock offerings

reliance on formal capital markets

Selling out, being acquired to obtain capital

for expansion

The Circular Model of Capital Flow

Stock of ProductiveCapacity

IndustrialOutput

BusinessIncome(Value Added)

Payments toHouseholds

Final ConsumerDemand

“Savings”

Investment

“Savings” - retained earnings, household savings, institutionalinvestors, international capital sources

•Interest rates•Tax policy & public investment

U.S. Capital Investment Trends

2006 Capital Stock Per Employee$0 $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000

Furniture

Wood Products

Apparel and leather

Printing

Miscellaneous

Febricated Metals

Plastics and rubber

Electrical equipment

Textiles

Food, beverage and tobacco

Transportation Equipment

Nonmetallic Mineral products

Machinery

Paper


Primary metals

Chemicals

Petroleum

Mean: $149,776

Manufacturing Capital and Wages Per Worker 2006

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

Fu

rnit

ure

Wo

od

Pro

du

cts

Ap

par

el a

nd

lea

ther

Pri

nti

ng

Mis

cell

aneo

us

Feb

rica

ted

Met

als

Pla

stic

s an

d r

ub

ber

Ele

ctri

cal

equ

ipm

ent

Tex

tile

s

Fo

od

, b

ever

age

and

tob

acco

Tra

nsp

ort

atio

n E

qu

ipm

ent

No

nm

etal

lic

Min

eral

pro

du

cts

Mac

hin

ery

Pap

er

Co

mp

ute

r an

d e

lect

ron

icp

rod

uct

s

Pri

mar

y m

etal

s

Ch

emic

als

Pet

role

um

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

Capital/Worker

Earnings/worker

Net Stock Private Fixed Assets Per Employee - 2007

0 500000 1000000 1500000 2000000 2500000 3000000

Farm employment

Forestry, fishing

Mining

Utilities

Construction

Manufacturing

Wholesale trade

Retail trade

Transportation and warehousing

Information

Finance and insurance

Real estate and rental and leasing

Professional, scientific, and technical services

Management of companies and enterprises

Administrative and waste services

Educational services

Health care and social assistance

Arts, entertainment, and recreation

Accommodation and food services

Other services, except public administration

Manufaturers' Ratio of Inventories to Shipments

0

0.5

1

1.5

2

2.5

1965 1970 1975 1980 1985 1990 1995 2000

Evidence of long-term reductions in capital tied up in inventoriesdue to better logistics in the product delivery system

Manufacturers’ Ratio of Inventories to Shipments

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Impact of theGreat Recession

Regional Differences in the Availability of Capital

QAQB

Interest Rate

DA

SA

DBSB

Capital Flows respond to interregional/international variations in interest rates, but:

1. Lender conservatism2. Institutional impediments3. Structural differences

Capital Mobility• Immobility of physical capital

• High level (potentially) of mobility for monetary capital, but:

(A) institutional impediments - nations, trading blocs, currencies

(B) industrial differences - firm size, age,

business concept

(C) public policies - incentives such as tax write-offs, lower interest rates

(D) new forms of integration (IT networks),

new types of securitization (e.g. REIT’s) & use of Modern Portfolio Theory

Spatial Variations in the Cost of Capital

• Historic fragmentation of capital markets

• Much more integration now, but still:A: “herding and fleeing” in commercial real estate markets

B: internationalization of markets yet institutional/cultural variations in practices

C: changes in investor culture: IPO’s & .com

phenomena

Managerial and Technical Skills:Corporate Headquarters

• The concentration of these in a few very large cities

• Synergistic interactions at the top of the corporate hierarchy

• Decentralization of these headquarters

• Structural relationship between headquarters location and location of R&D facilities – historic geographic co-location

Borchert’s Changes

in Industrial

Headquarters

Patents As Indicators of Technical Knowledge Effort

Change in State Level Distribution of Patents

Distribution in cities has gotten more unequal inrecent years, largely due tobig changes in the West.

The big gainers have beenDriven by Boise,Rochester NY, Austin-San Marcos, Burlington,Ft. Collins-Loveland, And Rochester MN

Technical Knowledge

•Fundamental to any type of production system

•Constantly changing - Schumpeter’s view of the “process of creative destruction” -

– invention: autonomous vs. induced– innovation: widespread adoption of inventions– product versus process change

•The R&D Process in manufacturing–patents as indicators of success at invention

2008 U.S. R&D Sources of Funds

Source: Statistical Abstract of the United States 2012

Fed. Govt26%

Industry67%

Univ/College3%

Non-Profit3%

Non-Fed Govt.1%

Historic Sources of R&D – U.S.0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Fed. Govt

Industry

Univ/College

Non-Profit

Non-Fed Govt.

R&D Objective Use of Funds 2008


Defense Related

15%

Space Related

1%

Other84%

Use of R&D Funds – U.S.

0% 20% 40% 60% 80% 100%

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Defense related

Space related

Other

Composition of R&D Effort 2008


0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Federal

Industry

Universities & Colleges

Other Non-profits

Basic Research

Applied Research

Development

Performance Sector, R& D United States 1999

Source: Statistical Abstract of the United States, 2000

Federal

Industry-Federal

Industry-Industry

Industry FFRDC

University-Federal

University-NonFed Govt

University-Industry

University-University

University-Nonprofits

University FFRDC

NonProfit-Federal

NonProfit-Industry

NonProfit-FFRDC

Nonprofit FFRDC

67.1%

7%

8.1%

University 13.9%

N.P2.6%

Performance Sector R&D U.S. 2008


6%

6%

85%

0%

0%0%0%

0% 0% 1%0%

1%

0%

1%

Federal

Industry-Federal

Industry-Industry

Industry FFRDC

University-Federal

University-nonfederal

University-Industry

University-University

University-Nonprofit

University-FFRDC

OtherNP-Federal

Other NP Industry

Other NP - Nonprofit

Nonprofit FFRDC

Washington R&D by Users of Funds

Source: NSF 2012 D – data not disclosed NA – data not available for this yearIndexed ranks are against Gross State Product, which controls size of state economies

Performer and Sources of Funds $ Millions 2008 Rank $

Used 2008 Rank

Indexed

2000 Rank $

Used

1993 Rank $

Used United States Sources: Total Used $16,696 5 6 8 11 A. Federal Government: Total Used (1) $258 18 24 14 21 B. Business: Total Used (2) $13,876 5 3 7 9 Federal Sources $717 14 13 D 8 Business Sources (3) $13,159 5 2 D 10 C. Universities and Colleges: Total Used(4) $1,058 14 34 14 14 Federal Sources $721 14 25 11 10 Non-federal Government Sources $61 17 32 35 32 University & College Sources $156 22 40 22 NA Business Sources $81 13 11 11 14 Non-Profit Sources $39 25 38 27 NA D. Non-Profits: Total Used (5) $1,504 4 4 4 5 Nonprofit FFRDC $1,137 4 4 4 NA Other Nonprofits $367 4 6 7 NA E. State Internal (6) NA NA NA NA

R&D $

0 5000 10000 15000 20000

Chemicals

Petroleum

Machinery

Electrical Equipment

Motor Vehicles

Aircraft & Missiles

Professional & Scientific Instruments

Other Industries - $40.9 billionSource: Statistical Abstract of the United States, 1998

R&D as a % of Sales - 20080.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

Scientific R&D

Computer & electronic Mfg.

Software

Aerospace Mfg.

Architecture & Engineering

Chemical Mfg.

Internet & data processing

Computer systems design

Information

All Manufacturing

All Industries

Machinery Mfg.

Electrical Eq. Mfg.

All Nonmanufacturing

Motor Vehicle Mfg.

Nonmetallic Mineral Mfg.

Fabricated Metals Mfg.

Paper Mfg.

Plastic & Rubber Mfg.

Food Mfg.

Primary Metals Mfg.

Technical Knowledge

Spatial Concentration of R&D activity Mobility and Availability of Technical

Knowledge in Space

Regional Consequences of R&D Effort

Research at the UW - Impacts on local industrial development

United States (AK & HI Inset)by Column Q

7,000 to 44,000 (10)3,000 to 7,000 (9)1,500 to 3,000 (10)

500 to 1,500 (9)0 to 500 (11)

United States Total R&D 1998 $ Billions

Alabama in this group

Data notDisclosed


1.77 to 5.98 (9)0.91 to 1.77 (10)0.58 to 0.91 (9)0.26 to 0.58 (11)0.1 to 0.26 (10)

United States Location Quotients All R&D 1998

AL inthis group

Not Disclosed


0.7 to 51.3 (16)0.6 to 0.7 (2)0.4 to 0.6 (9)0.2 to 0.4 (5)0 to 0.2 (17)

United States Location Quotients Federal R&D 1998

1.192.84


1.58 to 5.46 (8)0.82 to 1.58 (11)0.57 to 0.82 (9)0.16 to 0.57 (10)0 to 0.16 (11)

United States Location Quotients Industry R&D 1998

0.27D


1.25 to 4.5 (8)1.05 to 1.25 (11)0.88 to 1.05 (10)0.64 to 0.88 (9)0.3 to 0.64 (11)

United States Location Quotients Universities R&D 1998

1.101.34


1.2 to 25.2 (19)0.9 to 1.2 (2)0.75 to .9 (5)0.5 to .75 (3)0 to 0.5 (20)

U.S. Location Quotients Federally Research Funded R&D 1998

.61.52

United States (AK & HI Inset)by Column B

2,900 to 18,900 (11)1,300 to 2,900 (10)

700 to 1,300 (6)300 to 700 (12)

0 to 300 (12)

United States # Patents 1999

United States (AK & HI Inset)by LQ-Patents

1.38 to 2.93 (10)0.95 to 1.38 (10)0.55 to 0.95 (11)0.38 to 0.55 (7)0.23 to 0.38 (13)

Location Quotient Patents Per Capita 1999

chapter 5: returning to labor, capital, land & technical skills how important are these factors...

Documents

labor cost differential

environmental slide

quarter slide

connecticut slide

labor productivityskill

cheap labor

cost of production

w labor costs