March 6, 2009 Volume 110 Number 5

What’s killing U.S. manufacturing?

Hint: It's not what you've been hearing

Ever hear about the overpaid union workers who made it too expensive to make anything in America? A new report by the non-profit Economic Policy Institute (EPI) suggests that piece of widely-believed conventional wisdom is inaccurate.

In Squandering the Blue-Collar Advantage, EPI economist Josh Bivens concludes that America’s blue-collar workforce is quite competitive with many overseas workers, but is undermined by an overvalued U.S. dollar, the high cost of U.S. health care, and ... overpaid managers.

The overvalued dollar is the most damaging factor, Bivens said, because it makes U.S. goods expensive abroad and foreign goods cheap here. Over the past 10 years, Bivens estimates, the currency imbalance created a 10 to 16 percent cost disadvantage for U.S. goods.

In theory, the dollar should lose value when the United States runs trade deficits, and that would make imports more expensive and exports more competitive — thereby bringing trade back into balance. But that hasn’t happened, in part because foreign investors bought U.S. assets to get in on the stock market run-up, and Asian countries, especially China, pursued a policy of buying dollars and dollar-denominated assets.

A second factor killing American manufacturing is America’s lack of universal, government-provided health care. In the United States, employers are expected to pay for employee health care. In 2007, employer-paid health benefits accounted for 9.2 percent of total compensation in U.S. manufacturing. Foreign employers also pay for health care, but in the form of taxes that support much more efficient health systems. The difference, Bivens estimates, amounts to a 4.6 percent cost disadvantage.

Finally, there’s the glaring cost difference that no one on the cable talk shows mentions: U.S. managers are grossly overpaid compared to their foreign counterparts. Managers in the U.S. manufacturing sector average 134 percent higher wages than production workers. If U.S. manager wages matched those in the middle range of these other nations, overall labor costs in U.S. manufacturing would be 6.4 percent lower.

The EPI report focused on rich country competitors. Trade with low-wage countries has been gaining in importance, but the bulk of U.S. trade flows still occur between the United States and other high-wage countries.

Within that group, U.S. factory workers are the cheap ones: Of the 20 richest countries that account for about half of U.S. trade flows, the United States ranks 17th in hourly pay for production workers in manufacturing.

When the United States runs trade deficits with these rich nations, the thinking goes, something besides wages has to be making U.S. products uncompetitive.

“If the story of U.S. manufacturing began and ended with its blue-collar workers, the outcome would be far different from what we’re seeing today,” Bivens concluded. “In hourly pay and productivity, U.S. manufacturing workers give their companies a significant competitive edge — one that is being drained away by other negative forces.”

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