Resurgence in US manufacturing: Relative labor cost

September 3, 2013

By Robert McCutcheon, Partner, US Industrial Products Sector Leader

 

The current recovery in the US manufacturing industry may not just be a temporary phenomenon, but an indication of a significant change in environmental factors, leading to a resurgence. Previously, we examined certain positive trends, including a lowering of transportation and energy costs, a relatively weak dollar, and high domestic market demand. Today, we’ll take a closer look at the impact of relative labor costs on the US manufacturing resurgence.

Unlike the three factors that make manufacturing in the US more attractive, the impact of domestic labor costs is more neutral. However, as the search for cheaper labor costs abroad was frequently cited as a primary cause for offshoring, this represents is a significant shift. Accounting for this shift is the change in relative wages between the US and China and other emerging countries. Wages in emerging countries are rising alongside demands from the middle classes for better overall working conditions. From 2008-2012, labor costs are expected to rise over 80% in China and to make similar gains over the next four years. In comparison, labor costs in the US for the same period are estimated to increase about 10%.

Despite these percentages, the cost premium, based on the difference in absolute wages between the US and China, has actually been expanding. For 2012, the average US manufacturing sector hourly wages are estimated to be $33.70, greater than wages in China. By 2016, that US premium is forecast to be $35.61. When considering relative productivity levels as measured by the change in manufacturing unit labor costs (labor cost per unit of manufacturing output), wage inflation in China is still not the most significant driver in reshoring from that country. This situation is not likely to change for the foreseeable future.

For labor intensive manufacturing segments, in particular, the labor cost differential is unlikely to result in reshoring. However, producers of heavy metals and industrial machinery might consider reshoring to take advantage of lower energy and transportation costs, and relocate to regions of the US where right-to-work laws have kept hourly wages relatively low. In addition, they could invest in the technology and automation to reduce workforce costs, increase productivity, and lower overall manufacturing costs.

Question to consider:
Are you using the latest workforce automation in an effort to reduce your labor costs?

Coming next: the availability of talent in the US compared to emerging economies

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