Hoosier Jobs: It’s Productivity, Stupid

January 22, 2012

For immediate release (587 words)

Here is an exercise in junior-high math. It takes 100 workers 100 days to make a locomotive. The workers are paid $100 per day. What are the labor costs of the locomotive?

Answer:  $1 million.

Here is a more advanced problem. Suppose another set of workers are paid $200 a day. Construct a story where it is actually cheaper to use the high-wage workers to make the locomotive.

Easy. If 60 high-wage workers can make the locomotive in 60 days the total labor costs are $720,000.

There are a number of economic lessons in these simple math exercises. A high-wage workforce can be attractive to manufacturers if, and only if, they are sufficiently productive. Second, lower productivity workers can make themselves attractive if they are willing to take lower wages. The key is to have what economists call low-unit labor costs — which incorporate the obvious interaction between wages and productivity. In the above example the high-wage workers have lower-unit labor costs.

A recent Wall Street Journal article reports that unit-labor costs in manufacturing in the United States have declined by 13 percent over the last 10 years. This is attributed to “more flexible work practices and increased automation” as well as “minimal wage growth.” In contrast unit-labor costs in manufacturing increased 2.3 percent in Germany, 15 percent in Korea and 18 percent in Canada over the same time period.

All this is of more than academic interest to manufacturing towns in Indiana, especially to my hometown of Muncie. Progress Rail, a subsidiary of Caterpillar Corporation, recently opened a locomotive production facility in Muncie. It also owns a unionized locomotive factory in Ontario, Canada. Press reports indicate that wages at the Ontario facility are around $30 an hour, while they are around $12-15 an hour in Muncie. In negotiations with the Canadians, Union Progress Rail is asking for 50 percent wage cuts as well as modification of factory work rules.

Not surprisingly the Canadian workers are appalled by the company’s request and are currently on strike: and on one level we all empathize with them. Who among us would welcome much less meekly accept our earnings being cut in half?

Although I have no detailed knowledge of production and cost data at either the Canadian or the Muncie facility, nor any details on the Canadian labor negotiations, I suspect that at the end of the day employment opportunities will expand in Muncie and decline in Ontario. The irony is that a traditional union stronghold like Muncie is likely to gain jobs as Canadian union power declines. A local Muncie pundit asks, “are we stealing jobs?”

A Hoosier enters the grocery store and faces a choice between three pounds of mealy looking Florida-grown tomatoes priced at $12 and three pounds of luscious-looking Canadian-grown tomatoes for $6. She buys the Canadian tomatoes. Did the Canadian producer “steal” a customer from the Florida producer? Just as no producer has a property right to a customer, no individual worker or collective labor pool has a right to a job outside a legally negotiated contract.

It is a stark and discomforting reality, but in the long run unit-labor costs drive job location. Simply insisting on high wages is hardly a strategy for ensuring the required level of productivity is in place to make those wages tenable. In my opinion it is not useful or enlightened to couch this as a moral issue. Rather the best we can do is encourage the development of those skills, attitudes and institutions that foster increased productivity.

Cecil Bohanon, Ph.D., an adjunct scholar with the Indiana Policy Review Foundation, is a professor of economics at Ball State University. Contact him at editor@inpolicy.org.


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