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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 2 Return of Manufacturing? II Examples • 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 hour 3 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 4 Return of Manufacturing? IV 5 Return of Manufacturing? V 6 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 7 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 8 Return of Manufacturing? VIII 9 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. 10 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 12 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 13 picking winners – Solyndra and Fisker 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 14