Flat U.S. Wages Help Fuel Rebound in Manufacturing - Assignment Example

Case 5 - Flat U.S. Wages Help Fuel Rebound in Manufacturing Executive Summary Flat U.S. Wages Help Fuel Rebound in Manufacturing It is no secret that the manufacturing sector of the American economy has been particularly hard hit in recent years. With the sluggish economy, waning consumer confidence, and less access to credit (among other factors), manufacturers have struggled to keep pace. This reality, however, appears to be drawing to a close as manufacturing numbers and production output have been up in recent quarters.

This phenomenon is partly fueled by the reality that wages in this sector have remained stagnant, ironically allowing manufacturing companies to catch up on their productivity and increase profitability due to less expense related to labor costs and benefits. It is important to understand the relationship that exists between labor cost and the cost of manufactured goods. In times of decreased production, if wages kept pace with inflation, many plants would quickly find themselves in dire situations.

With the tables reversed, however, and production picking up due to stagnant wages, many industries in the manufacturing sector are returning to the United States. This further fueling the economic development, even though many argue that the retailing and services side of the economy are left out in the dark because of decreased buying power exhibited by workers. There are certainly challenges facing the manufacturing industry in America as it continues to compete in an increasingly global economy, but the current signs are positive and the trends are moving in the right direction.

Critique Flat U.S. Wages Help Fuel Rebound in Manufacturing While it may be plausible to consider flat wages as a contributing factor in the current rebound being exhibited by manufacturing industries, there are other underlying causes as well. The volume of workers involved the manufacturing end of the American economy is quite high. They, in essence, are primary purchasers of the very products that they are involved in creating. With wages rising at lower than the rate of inflation, or not at all, their purchasing power is severely diminished.

This has resulted in stagnant purchasing growth amongst many demographic groups, even as the economy begins to recover from a tumultuous half-decade of poor results. It is true, however, that decreased labor costs, relative to inflation, has resulted in an improved bottom line across many manufacturing based industries. With unemployment still quite high, this economic recovery is further enabling manufacturing companies to increase their output, while reducing their actualized labor costs. As companies begin to hire once again, they are looking for workers with relatively low levels of experience.

This not only creates fresh talent within the labor pool, but it also means that companies can hire new workers for less money. Consider one company in Michigan that is hiring new people to work on the assembly for a wage of $10 an hour. This is compared to $18 an hour than experienced workers doing the same job would earn. Other plants are realizing new labor costs at $8-$10 below the wages agreed to on previous contracts, further enabling manufacturing companies to increase production, and reduce labor expenses simultaneously.

We know that wages, in general, increase over time. This has been particularly true in the private sector. Historically, manufacturing companies have been no exception to this rule, especially in areas that are dominated by labor unions and negotiated worker contracts are the norm, rather than the exception. This has all changed with the recent economic downturn. With so many people out of work, manufacturing companies have been able to slowly reduce labor costs to below what they were at the start of the crisis.

Consider the fact the one company just negotiated a new labor contract for new employees that was $8-$10 an hour below below that of a previous contract. The terms were so good that the company moved its existing plant from Mexico back to the state of Kentucky (Wessel & Hagerty, 2012). In this sense, it can certainly be shown flat to receding wages in the United States is currently fueling this recovery in the manufacturing sector. In fact, it is sparking job growth in many locations. It is interesting to note that the example of the company moving back to America from Mexico negotiated a new labor contract, complete with reduced hourly wages, with the blessing of the local labor union.

Wages today are back to where they were in 2000, more than 3% below what they were in 2009 (Wessel & Hagerty, 2012). This trend is likely to continue into the foreseeable future as there are many more workers seeking employment than there are jobs. References Wessel, D. and Hagerty, J. (2012). The Wall Street Journal (29 May 2012), 55-57.