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The good news behind falling wages

Rick Newman
Senior Columnist

Nobody ever wants a pay cut. But the punishing drop in wages in several U.S. industries could end up drawing more companies to the United States and helping produce millions of new jobs.

New data published by the Boston Consulting Group shows the United States is becoming considerably more competitive when it comes to labor costs for manufacturers. In 2004, for instance, 11 of the top 25 export nations had labor costs lower than in the United States. That has since fallen to 9.

Beneath that modest improvement are big gains compared with top manufacturing competitors, especially China. In 2004, U.S. manufacturing wages adjusted for productivity were 4 times higher than those in China. Today, they’re just 2 times higher than Chinese levels. When factoring in energy costs, exchange rates and other factors, the cost of manufacturing in China is just 4% less than in the United States, down from 14% a decade ago, according to BCG.

With costs evening out, Boston Consulting predicts reshoring, as it’s known, could generate between 700,000 and 1.3 million new manufacturing jobs by 2020, plus as many as 3.5 million addtional jobs through increased economic activity and exports. Several big manufacturers, including General Electric (GE), Nike (NKE), Ford (F), Newell Rubbermaid (NWL) and Brooks Brothers, have already moved overseas work back to the United States during the past few years, or kept work here when considering a change. Walmart (WMT) has pledged to support the revival of domestic manufacturing by spending $50 billion through 2023 on U.S.-made goods.

A lagging recovery

The question, however, is when this shift will benefit workers. U.S. manufacturing employment peaked in 1979, then drifted down for about 20 years, until it began to fall sharply after the 2001 recession. The number of manufacturing jobs bottomed out in 2010 at 11.5 million, and has since bounced back by 6.1%. But total U.S. employment has risen by 7.2% during the same time frame, which means the manufacturing recovery has lagged behind the broader economy.

The decline in manufacturing wages, meanwhile, has been good news for manufacturers but bad news for workers bearing the cuts. Since the recession ended in 2009, average hourly wages in the private sector, adjusted for inflation, have been essentially flat (though there are signs they may finally be on the rise). In manufacturing, wages have fallen by 2.4% and in the auto industry — where unions made major wage concessions as part of the General Motors and Chrysler bankruptcies — real wages are down by 6.4%. Those declining wages are one of the very things luring manufacturers back to America, but they also show that a manufacturing revival, if there is one, is benefiting employers much more than workers.

Other factors besides labor costs are luring manufacturers to U.S. shores, most notably falling energy prices occurring as a result of the boom in oil and gas drilling. But some analysts question whether a handful of firms employing dozens or even hundreds of manufacturing workers at reduced wages will move the needle in an economy that employs 140 million people and is addicted to cheap imports. In fact, one of the biggest problems in the economy today is stagnant wages. While the number of jobs has hit new highs, many workers earn less than they did a few years ago.

Manufacturing has become a technology-driven industry that still pays decent wages to skilled workers able to operate complex machinery, while robots and other types of automation replace the types of lower-skilled workers who once moved metal along assembly lines. “So many manufacturing-related trends have gotten worse that it blows major holes in the manufacturing renaissance meme,” says Alan Tonelson, founder of the public-policy blog RealityChek.

He points out that China’s labor costs are rising partly because Chinese factories are turning out much more sophisticated goods — such as industrial machinery and construction equipment, rather than just shirts and shoes — and that requires more highly skilled workers. Plus, there’s been no slowdown in Chinese exports to the United States. “Whatever comeback there’s been in manufacturing, it’s been done by taking the low road and cutting wages,” Tonelson says.

If BCG is right, manufacturing wages ought to rise as more U.S. factories open and the pool of available labor shrinks. Whether that will ever reverse a 25-year offshoring trend is debatable, yet more good-paying manufacturing jobs would certainly be welcome, in any measure.

Meanwhile, the picture is a bit brighter when comparing U.S. manufacturers to competitors in countries other than China. BCG’s data show that, since 2004, the United States has pulled ahead of Poland, South Korea, the Czech Republic and Brazil in terms of the combined total of labor and energy costs. And the U.S. advantage over Canada, Japan and Australia has widened. We may not be No. 1, exactly, but we’re better than somebody.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.