NS3040 Fall Term 2014

Return of Manufacturing?

Return of Manufacturing? I

• Steven Rattner, “The Myth of Industrial Rebound”, New York Times, January 25, 2014

• Many feel that the United States will be going through a new industrial revolution and a manufacturing resonance.

• There is some evidence of this:

• some companies reshoring from their Asian operations

• new start-ups in high tech sectors

• However a closer look suggests that we shouldn’t be overly optimistic

• Only a trickle of new jobs created in the sector

• Often dependent on huge public subsidies

• In order to compete with China and other low wage countries, jobs offer less in

• Health care, pensions, and

• Benefits than industrial workers historically received

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Return of Manufacturing? IIExamples

•2012 GE opened its first assembly line in 55 years in Louisville, Ky.

• Jobs started at just over $13.50 an hour, or

• less than $30,000 a year – much less than usually associated with manufacturing

•When Volkswagen opened plant in Chattanooga, Tenn. in 2011

• company hailed for bringing 2,000 fresh auto jobs to America

• However beginning wage for assembly line workers $14.50 per hour about half of what traditional unionized workers at GM and Ford received

• With benefits – jobs cost Volkswagen $27 per hour3

Return of Manufacturing? III

• In Germany the average auto worker earns $67 per hr.

• In effect Volkswagen has moved production from a high wage country (Germany) to a low wage country (US).

• All told wages for blue collar automotive industry workers have dropped by 10 percent after adjusting for inflation since recession ended in June 2009

• By comparison wages across manufacturing dropped by 2.4% during the same period while

• Earnings for Americans in equivalent private sector jobs fell by only 0.5 percent

• Poor wage trends a central reason for the slow economic recovery – without sustained income growth consumers can’t spend

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Return of Manufacturing? IV

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Return of Manufacturing? V

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Return of Manufacturing? VI

• Low wages not only price America pays for retaining manufacturing jobs

• Hefty subsidies from federal, state local government agencies often required

• Tennessee provided around $577 million for Volkswagen -- $288,500 per position

• To get 1,000 Airbus jobs, Alabama provided a benefits package of $158 million

• Now Boing has used threat of moving to non-union, low wage state to win a record subsidy package of $8.7 billion from Washington State – and labor concessions

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Return of Manufacturing? VII

• In actuality the U.S. has gained just 568,000 manufacturing positions since January 2010

• Small fraction of the nearly six million lost between 2000 and 2009

• A slower rate of recovery than for nonmanufacturing employment

• Challenges to American manufacturing have grown as less developed economies have become more adept

• Mexico each auto worker earned $7.80 hour in 2012

• Productivity as high as in the U.S. where total compensation costs were $45.34 per hour

• No surprise in 2013 Mexican automobile production 50 percenthigher than several years earlier

• Output in U.S. at same as 2006 level

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Return of Manufacturing? VIII

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Return of Manufacturing? IX

• Hope is that the US energy boom will provide an incentive for manufacturers to locate here

• However only one-tenth of American manufacturing incurs significant energy costs

• Still, we do need to maintain an industrial presence, but not for many of the obvious reasons

• Companies often locate research and development facilities – with high paying jobs near their manufacturing facilities

• In addition to jobs R&D yields high-value intellectual property that spills over into still more innovation and employment

• Every manufacturing position requires an additional 4.6 service and supplier positions to support it.

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Return of Manufacturing? X

• Challenge for the U.S. particularly acute because:

• Manufacturing accounts for just 12% of our economy down from a peak of 28 percent in 1953

• On a par with France and Britain as the least industrialized of major economies

• Keeping that share should be a priority

• Need to avoid raising false hopes such as

• the President’s pledge of creating a million manufacturing jobs by end of his second term or

• Ill conceived policies – special subsidies for manufacturing

• On other hand President’s strategy over last several years appears sound

• more training focused on skills needed by employers, and

• increased spending on research and development 11

Return of Manufacturing? XII

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Return of Manufacturing? XIII

• U.S. Workforce is simultaneously over qualified:

• 15% taxi drivers are college graduates and

• Underqualified (US ranks in bottom half of many comparisons with developing countries

• When Volkswagen arrived in Chattanooga found not enough applicants had technical skills so established a German style apprenticeship at the factory

• As for research and development, fiscal tightening by federal government has prevented more investment in this critical area

• Exact opposite of what is required

• As for public policy toward the private sector:

• Need to be careful with subsidies

• Need to stop meddling in private activity and particularly idea of picking winners – Solyndra and Fisker 13

Return of Manufacturing? XIV

• Manufacturing would benefit from same reforms that would help broader economy

• Restructuring of corporate tax code

• New policies to bring in skilled immigrants

• Added spending on infrastructure and

• More trade agreements to encourage direct foreign investment

• Those who see a brighter picture for the U.S.

• Argue that wages are rising more rapidly elsewhere not just in China Brazil but also Japan, Germany and France

• Flip side, wages rising faster elsewhere means they are rising more slowly here

• Essence of our challenge – in a globalized world there will always be another China

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