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Week of May 21, 2012

Tauber study a wake-up call for manufacturing

A recent uptick in U.S. manufacturing has optimists hoping a lost decade that saw steep employment drops in the sector is coming to an end.

Productivity is up, a relatively cheap dollar is boosting exports, and the wage gap between the United States and China is shrinking. Some companies are repatriating operations from overseas. But a huge portion of U.S. manufacturing, as much as 40 percent, could either stay in this country or go elsewhere in the coming years based on policy decisions, according a study by the Tauber Institute for Global Operations and consulting firm Booz & Co.

How the United States shapes education policy, worker training, the tax code, the regulatory environment and its relationship with Mexico will determine whether manufacturing continues to rebound or spirals into permanent decline, say Stephen M. Ross School of Business professors Wally Hopp and Roman Kapuscinski, co-authors of the Booz study Manufacturing’s Wake-Up Call.

U.S. factories produce about 75 percent of what the country consumes, according to the study. The right decisions by both business and political leaders could push that to 95 percent. Manufacturing directly accounts for 11 percent, or $1.47 trillion, of U.S. GDP. That rises to 15 percent of GDP when including economic activity directly linked to manufacturing.

More than wages

U.S. manufacturing held its own until about 2000 when employment levels dropped as the trade deficit increased. Low-skill jobs were lost due to productivity gains and offshoring, and investment in new facilities lagged.

High wages don’t fully explain the U.S. phenomenon. Wages are just one factor of many when companies decide where to build factories. Just as important are worker skill level, the presence of industry clusters, nearby emerging consumer markets, and competitive regulatory and tax rules.

An issue that looms particularly large in the U.S. is finding technically trained production workers. The issue of worker skill increasingly will become a critical policy issue as factories become more automated and driven by new and rapidly evolving technology, Hopp says.

All roads lead to education

American preoccupation with college preparation has marginalized vocation education and industrial arts programs, according to the study. To meet future employment needs, schools must recover their vocational training roles and also become more adept at vocational guidance to ensure that young people realize the diverse career paths in manufacturing. “If you talk about manufacturing long enough, all roads eventually lead to education,” Hopp says. “A huge determinant of how many manufacturing jobs remain in the U.S. will be our ability to create a skilled workforce.”

Policy matters

While heavy government intervention in business isn’t encouraged by executives, lawmakers can help create a stronger environment for manufacturing. The United States has the second-highest statutory corporate tax rate — 39 percent — among countries in the Organization for Economic Cooperation and Development. The current complicated code also adds compliance and tax strategy costs. Regulatory compliance also is a sore spot with manufacturers in the U.S., mostly because of the time it takes to get through the process. The United States also needs to build a stronger relationship with Mexico, Hopp says. While some low-skill operations will be sent offshore every year, keeping them closer will allow R&D and engineering jobs to stay stateside.

Another good government policy would be to encourage industry clusters, such as Silicon Valley, the study notes. Government can concentrate on infrastructure development in areas where organic centers of industry have begun to sprout.

The full version of this article can be viewed at www.tauber.umich.edu.

 

FACULTY SPOTLIGHT

David Potter, Francis W. Kelsey Collegiate Professor of Greek and Roman History, on loving graduate school: “Mostly because I had the freedom to develop my own research interests and had intelligent people to talk to about it.”

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