Low wage manufacturing

by Bruce Shields

The episodic political funny season is again rapidly approaching as the calendar turns to 2012. Cultural philosophers speak of alternative narratives. In the context of a national political campaign, competing alternative narratives seek to dominate the formation of our government. For instance, in 2008, two alternative narratives were heard frequently about the war in Iraq. One from those sympathetic to the Bush administration was that Saddam Hussein had become dangerous to key US interests in the world and had been removed for that reason. Another heard from people seeking to replace the policies of the Bush administration was that the sole cause of the war in Iraq was corporations seeking to profit from control of Iraq’s oil reserves. A normal citizen who is not a policy buff may find sorting out the competing claims to be very difficult.

A complaint commonly being heard in this season is that America’s unemployment has been created by unprincipled transfer of American jobs to other venues where workers are paid starvation wages in factories with conditions resembling forced labor. This phenomenon is described by various terms such as job flight. At the same time, many political leaders are hoping to conclude treaties opening markets with many countries in the interest of promoting more international trade. These two narratives, that trade with low wage countries promotes prosperity in the US, and that trade with low wage countries impoverishes Americans who lose their jobs, are fundamentally incompatible. Probably no reconciliation can be made. My personal premise is that wider trade benefits all workers, in every country. I would argue that low wages, taken in isolation, do not motivate the migration of manufacturing.

Why would a manufacturer move an operation? The response is that a manufacturer of goods will not. But an enterprise which sells particular merchandise may find one source to be less costly and therefore more profitable than another. We are all aware of the Industrial Revolution, in which the development of large organized shops allowed the cost of goods to drop to where virtually all citizens could afford items formerly available only to the very rich. Before industrialization, fabric was so costly that poor people almost exclusively wore clothing discarded by the rich. Now everyone can have his own new clothing at very affordable prices. It is the sales and distribution enterprise which will endeavor to establish new sources (including overseas), not the manufacturer. Indeed, manufacturers have been notoriously arrogant about dictating to the market: Henry Ford’s famous comment in the 1920’s that Americans could have any color of car that they wanted, as long as they wanted black, could be multiplied by the thousands across hundreds of manufactures. Marketing organizations have changed the relationship between manufacturers and the public. The Great A & P Tea Company nearly a century ago gave customers choices of foods, and the modern food industry followed. Walmart and other stores of that type have consistently sought to improve the affordability of their goods. Their marketing has been so successful, and they have grown to dominate the selling of goods to such an extent that the retailer now places an order with the manufacturer. If the manufacturer cannot meet the terms and conditions of the retailer, that manufacturer will be replaced. That change of relationship has completely upset commercial expectations going back several centuries. Detroit auto-makers right into the 1990’s continued to dictate to consumers what they could buy, and how they would buy it. If a customer in 1990 wanted a 5 speed manual transmission, that came exclusively in an “Indy 500” themed car. Japanese manufacturers issued cars configured as customers wished, and grabbed a huge share of the market.

The willingness of a manufacturer to meet the specifications of retailers is probably the dominant reason why manufacturing is transferred offshore. A second consideration is that having particular facilities set in many locations around the globe gives much greater opportunity for sales internationally. A distributor of domestic washing machines may find that a huge increase in global sales can be achieved by siting a plant in Sao Paulo, Brazil. It may also be less costly to import back into the US a particular model from Brazil than to assemble the same model in a smaller factory in the US.

Wages per se have very little influence in that kind of decision. One should also note that there is a huge difference between posted wages and effective wages. A highly productive US worker in a fully automated factory may very well have an effective wage per unit produced far lower than counterparts in undeveloped countries doing most work by hand. Many poor countries have ill-considered laws which in effect force a manufacturer to pad the payroll, or requiring months or even years of severance pay for any worker fired (even for cause). Many countries impose very steep payroll taxes. To say a worker in Columbia earns $1.00/ hour while a worker in the US gets $20.00 is largely irrelevant: the American worker may produce more widgets per $1.00 of wage than his Columbian counterpart. Additionally, such matters as police protection, losses from theft and embezzlement, infrastructure such as communications, utilities, roads and ports, requirements from local officials for bribes and donations, all tend to dilute the importance of posted wages for determining where to site a factory. In short, by the time a manufacturer is examining comparative wages, a decision has already been made to relocate based on many other factors.

Bruce P. Shields

6405 Garfield Rd

Wolcott VT 05680