The Future for US Manufacturing: Labor Costs Changing

Taking a rather alarmist title to grab your attention is standard media fare, so maybe we can excuse the Telegraph for suggesting that the rest of the world should beware of the threat of a US recovery. (Update: for the month of September, the ISM PMI registered 51.5 percent, an increase of 1.9 percentage points from August’s reading of 49.6 percent, indicating a return to expansion after contracting for three consecutive months, according to the ISM’s release.)

But the essential thrust of the article is an interesting one, even more so because it is based on a new study by the well-regarded Boston Consulting Group (BCG), examining the future of US manufacturing.

Driven by strong fundamental improvements in competitiveness, the report argues that within a few years the US will become a global manufacturing hub. In other words, the world’s multinationals will establish factories and assembly plants in the US for the sole purpose of exporting goods to Europe, the UK and Asia.

Rather than building on the spotty trend of nearshoring or reports of strains in global supply chains, the report argues that two other major trends are supporting the BCG’s case.

The first is an improvement in relative labor costs between the US and emerging markets.

Wages in the US have stagnated since well before the financial crisis such that, relatively speaking, once adjusted for their productivity, US workers are becoming cheaper and more competitive than was the case 10 to 15 years ago, when low-cost country sourcing took off.

For example, while the wage gap between Chinese and US workers is still significant, it has narrowed. According to MIT, US workers had average annual wage increases of 3 percent between 2003 and 2008, but Chinese workers saw 19 percent gains, gradually eroding the huge difference that first drove low-cost country sourcing.

So will a chunk of the jobs expected to come America’s way be low-wage, the article asks? The answer is inevitably yes, but with 20 million unemployed or in part-time working gigs, maybe that is a price worth paying.

The second development is the tapping of America’s vast reserves of shale gas, which has driven down energy costs for manufacturers, making energy costs in the US some of the lowest in the developed (and indeed, much of the developing) world.

To be continued in Part Two.

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