How did Europe avoid the loss of manufacturing jobs?

This from Rajeev Pillay,

General Partner 
Abacus International  Management L.L.C.  
”For Development Solutions You Can Count  On”

The rust belt is hurting. So is coal country and so are so many former manufacturing communities in the heartland of America. If there is a single underlying cause for the anti-establishment anger that led to the elevation of Donald Trump to the Presidency, it is the loss of well-paying jobs in parts of the country that were heavily dependent on mature manufacturing and extractive industries.

This is not a sudden development. Rather it is part of a trend over the past 30 years that has seen a gradual and inexorable decline in the real wages in the manufacturing sector as industries have matured. Over time, workers who lived a comfortable life have seen their wages erode. Workers have had to accept cuts in their wages and benefits or have seen their jobs migrate abroad to countries with lower wage structures. While in the past, manufacturing workers earned a wage significantly higher than the U.S. average, by 2013 the average factory worker made 7.7 percent below the median wage for all occupations. By end-2104, more than 600,000 manufacturing workers made just $9.60 per hour or less. More than 1.5 million manufacturing workers—one out of every four— made $11.91 or less[1]. Many workers have to hold two or more jobs in order to make ends meet.

Despite this, manufacturing plants have had to move to emerging economies, many of which have average wages that are still considerably lower than those in the U.S. Unable to expand their markets sufficiently rapidly, bottom line profits have been boosted by rapid rises in productivity either through the introduction of new technologies on assembly lines or a reduction of labor costs. The reduction in labor costs has typically been achieved through massive layoffs or a reduction in wages and in some instances, both. It is fairly clear that this is a secular trend for the nation as a whole with a wholesale loss of jobs in traditional manufacturing; clothing, heavy machinery, furniture, automotive products and other industries that require only moderately skilled workers.

By contrast, Germany, Sweden, Denmark and a few other developed economies in Europe have fared quite differently. In 2013 average hourly pay in manufacturing in Germany stood at $48.98, one third higher than in the $36.34 in the United States. Yet, the German manufacturing sector remained relatively stable between 1997 and 2013 in the face of competition from China, while the US lost 5.4 million manufacturing jobs during the same period[2].

Why is this? This is largely because governments in these countries have understood that in order to maintain high wages and to continue to grow, they would have to migrate towards a high tech, knowledge, and service based economy. Manufacturing in the high tech space requires fiscal incentives to grow the sector, a higher level of skill, access to capital and new and extensive investment in essential infrastructure.

President Obama understood the challenge very well. Although he was blocked at every turn by a hostile Congress, he understood that macro policies would need to address the structural challenge. He was committed to moving the country towards green technologies that were good for the environment, but equally importantly would place the US in the driver seat in the expansion of new and innovative areas that will underpin industry and the economy of the future. He encouraged high tech entrepreneurs to participate in the transformation. Furthermore, he was committed to investing government resources into the infrastructure required to support the rapid growth of clean energy and green technologies. Finally, he was committed to improving public secondary education and access to tertiary education by making it less expensive and providing new and less expensive ways for students to finance their studies.

Hillary Clinton too, to her credit, had a fully fleshed out raft of macro policies[3] ranging from investments in infrastructure, encouraging clean energy (making the US a “clean energy superpower”), improving trade policies, investing in computer sciences and STEM education, creating a “lifelong learning system that is better tailored to 21st century jobs”, increasing access to capital for small businesses and start-ups focusing on young entrepreneurs and the deferment of student loan payments[4].

Although he has come to office promising to “Put America to Work Again” as a convenient corollary to “Make America Great Again”, it is very difficult to understand what Donald Trump’s policies for creating jobs and expanding the US economy are. So far he seems to have focused on doing individual, company-specific deals on a micro-level to save jobs on a case-by-case basis. Such deals save relatively few jobs at relatively high cost in the short-term, but will fail to stem the loss of well-paying jobs in the long run unless complemented by sound macro policies.

Much has been made of the Carrier deal. United Technologies, through its Carrier subsidiary manufactures air conditioners in this country. President Trump initially claimed that he had reached a deal to save some 1,100 jobs at the Carrier plant in Indiana, preventing them from being moved across the border to Mexico. This was only just over half of the total of 2,100 jobs that were supposedly under threat at the plant. The actual number saved, however, was even smaller because 300 of the jobs were white-collar positions and were never slated for relocation[5]. The total number of jobs saved was, in practice, therefore, just 800, or about 44 percent of the total 1,800 that would otherwise have been lost. How did he manage to save these jobs? With the help of his Vice-President, Mike Pence, Governor of Indiana at the time, $7 million in State tax breaks were scheduled to be paid to Carrier over 10 years, or $700,000 per year. That is $875 per worker per year for each of the 800 jobs saved[6]. No doubt once the tax breaks wear off, all things being equal, the jobs would once again more likely than not, be transferred abroad. Subsidies are expensive, distort markets and work only in the short run. In fact, Carrier’s parent company, United Technologies, has since 1993, received 819 state and federal subsidies worth a total of $881 million, or about $38.1 million a year for 23 years. That doesn’t count 10 major loans worth $46 million over the same time[7]. That is just one company.

Although his policies have never been spelled out, President Trump has claimed that he will negotiate more favorable trade regimes for the US with individual countries. Where he sees inequities, he will slap on tariffs barriers to render goods manufactured overseas more expensive and less competitive.

None of the above are policies. They are ad hoc tactics, geared to paying to media, and are intended to gain brownie points in the political arena. While he may develop a more sensible raft of policies in the long run, as presently stated, Trump’s approach if perpetuated will keep the American economy mired in mature, slowly growing industries, raise the level of state and federal debt and make retail products more expensive domestically, creating even greater financial hardships for the average American in the long run.

[1] Ruckelshaus Catherine and Sarah Leberstein, Manufacturing Low Pay: Declining Wages in the Jobs That Built America’s Middle Class, National Employment Law Project, November 2014.

[2] See Economic Policy Institute at http://www.epi.org/publication/high-wages-arent-to-blame-for-the-decline-of-u-s-manufacturing/

[3] https://www.hillaryclinton.com/issues/jobs/

[4] https://www.hillaryclinton.com/issues/technology-and-innovation/

[5] ABC News, Julia Jacob, 300 Carrier Jobs Trump Touts for Indiana Were Never Moving to Mexico, December 2, 2016.

[6] Forbes, Eric Sherman, Trump’s Carrier Deal Means Nothing for Future Jobs, December 4, 2016. (http://www.forbes.com/sites/eriksherman/2016/12/04/trumps-carrier-deal-means-nothing-for-future-jobs/#36f10f034c7b)

[7] http://subsidytracker.goodjobsfirst.org/prog.php?parent=united-technologies

 

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About D. Posnett MD

Emeritus Prof. of Medicine at Weill Cornell Medical College
This entry was posted in Uncategorized and tagged , . Bookmark the permalink.

2 Responses to How did Europe avoid the loss of manufacturing jobs?

  1. mikeann919 says:

    Hi David,

    I would add that the relationship between management and labor is more collaborative and beneficial to the economy compared to the USA. Thanks for this.

    Best Mike

    Sent from my iPad

    >

  2. Pingback: Manufacturing in the US | Resist and Replace

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