Made in America ... By Machines
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With the U.S. economy stuck in neutral, new job growth has been anemic. Over the past twelve months through September, non-farm payrolls (non-seasonally adjusted) grew by 122,000 positions per month. Average monthly private payroll growth at 149,000 jobs is just marginally better. So, with Election Day 2012 looming, no Washington politician, Democrat or Republican, will be without his own plan to fire up job creation.
President Obama's American Jobs Act, sent to Capitol Hill on September 12th, is in keeping with the longstanding Washington tradition of proposing temporary expedients to deeply rooted structural issues. In the case of manufacturing employment, it is our opinion, the President's proposed legislation, even if enacted in its entirety, will do little or nothing by itself to increase the number of jobs on the factory floor.
There are many reasons why manufacturing employment has fallen from a peak of 19.7 Million jobs in 1979 to 11.8 Million today. Those range from managerial incompetence to a revolution in transportation. Lower nominal wages abroad only partially explain the shift. Low wages reflect lower productivity. Versus eighteen other developed and newly industrialized nations (such as Korea or Taiwan), the U.S. ranks high in terms of manufacturing productivity.
Expanding manufacturing employment in the U.S. requires eliminating disincentives built into the tax code and in our entitlement programs. The two make labor more relatively expensive to capital (in the form of automation or labor saving investments). Since 1979, net capital investment (the cumulative sum of gross capital investment less depreciation) by the private sector has averaged 6.8 percent per annum. In contrast, total spending on wages and salaries by the private sector since 1979 has averaged 5.4 percent per annum.
Capital investment has been spurred by accelerated depreciation methods. By lowering a business' effective tax rate, these make capital investments at the margin more attractive. On the other side of the equation, a steady increase in FICA (Federal Insurance Contribution Act) rates and income ceilings have made labor progressively more expensive. Rising health care costs have aggravated the problem.
In 1978, the average manufacturing employee's wage was 72 percent of the FICA income max. One year later, the ratio fell to 60 percent; by 1983, it had fallen to 51 percent. Wages had not dropped; rather the income ceiling set by legislation had risen. By increasing the FICA contribution rate, Washington made labor more expensive. Businesses no longer could look forward to a FICA holiday on overtime pay. Firms responded by substituting machines for humans.
The U.S. will remain a manufacturing center. The question is whether it will be driven by machines or by people.
The underlying analysis was based on gross domestic product and national income data obtained from the Bureau of Economic Analysis (BEA).
Manufacturing production employee wage data was obtained from the Bureau of Labor Statistics (BLS) as was manufacturing employment data.
FICA income ceiling and contribution rates were obtained from the Social Security Administration's (SSA) Office of the Chief Actuary. These are for the Old Age and Survivor Insurance (OASI) program only.
(Source: BEA, BLS and SSA.)
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