Monday, May 21, 2012

Midwest Closes Business Cost Gap With the South

WSJ -- "The Midwest has largely closed the cost gap in competing for companies with the South, traditionally the nation's cheapest region in which to do business.

A gauge of Midwestern business costs—a mix of labor, energy, taxes and real estate—stood at 96% of the U.S. average in 2010, according to an index compiled by Moody's Analytics. That is barely higher than the South's 95% of the average—and the distance between the regions has narrowed sharply over the past decade.

For decades, the South's cost advantages, lack of widespread unionization and business-friendly laws have lured companies from Northern states as well as factories set up by foreign companies. As more employers in the South compete for workers, and as workers there grow more skilled and productive, wages have risen.

While the South is still cheaper, it "is becoming more expensive because of their success," said Tracey Hyatt Bosman, managing director and leader of the Midwest practice at Biggins Lacy Shapiro, a site-location consultancy."

Case in Point:

"As part of a recent expansion, Bassam Homsi, president and founder of  Ohio-based Autotool, Inc. —which helps manufacturers retool assembly lines as they update products and processes—looked at moving his headquarters to Alabama to lower costs and be closer to Southern customers. Mr. Bomsi said he found electric power there was about 30% more expensive, and that labor, while cheaper overall, wasn't much less expensive for the engineers and other skilled workers he needs most.

"We looked at the utility cost and the labor cost. From the nonskilled labor side, it's about 70 cents on the dollar in Alabama versus Ohio," Mr. Homsi said. "But when it comes to skilled labor, there are a lot of multinational companies that have set up shop, and they offer a very rich compensation package that midsize companies can't compete with. If you take skilled labor and add all the hidden costs, it was probably more expensive down there," he said."

MP: A few comments.....

1.  It wasn't specifically mentioned in the article, but I would think that the new two-tiered wage structure for unionized workers in the automotive, steel and tire industries has to be a major factor in reducing labor costs in the Midwest.  Manufacturing companies can hire new workers today at wages that are 50% less than several years ago, and that 50% savings on labor costs for new workers can play a significant role in reducing overall production costs.      

2. The fact that wages and other costs are rising in the South as a result of its past success in attracting businesses is similar to the situation in China, where wages and other costs are rising as well as a result of its past success at attracting outsourced production to take advantage of its low-cost labor.  And just as China has lost some of its previous cost advantage, so has the South lost some of its previous cost advantage.

Result? Manufacturing is moving back to the U.S. from China, and perhaps manufacturing will return to the Midwest from the South. 

HT: John Sturges


At 5/21/2012 4:49 PM, Blogger Bob said...

People don't think about the U.S. as an optimal currency area but that's what it is. Under the basics tenants of the theory, even America wouldn't look like a good candidate to form one. However, capital and labor are very mobile within the country which makes it work. Mudell should take a victory lap as it seems to be an economic theory that has been very prescient. There are other people who wrote various institutional and cultural factors such as a common language that also would explain why it works here and not in Europe. When forming the EU, the changes they made took this into account. Naturally, just changing laws about capital flows and immigration doesn't open the spigots so they came up with endogenous OCA. Whereas in the U.S., Midwest and South adjusted in a decade, the Eurozone did everything it could to stop it from working and that's why Greece is blowing up. Capital and labor should have been flowing out of the country over the time period. Transfers and Deficit spending instead created an illusion of prosperity and convergence with the rest of the EU

At 5/21/2012 4:51 PM, Blogger Marko said...

So, I guess it turns out that focusing on profit in the end DOES help workers, if you think that rising wages and more jobs help workers (I think think it does).

If you leave it to the government, populist forces allow groups to form labor monopolies (labor unions) that skew the market so badly that they eventually drive away business and hurt the workers. It helps union bosses in the short run, but hurts workers in the long run by driving away jobs and paying "too much" for a given low skill job, which diverts labor from more productive uses (in other words, makes people think they can make more money at a low skill job than a high skill job and then dumps them without skills on the market 20 years later).

At 5/21/2012 9:09 PM, Blogger Hydra said...

I wonder when the south will catch up on quality of life issues.

When I was negotiating for a raise I'm the south, my boss pointed out that the cost of living was lower there.

That has nothing to do with it, I pointed out: the question is how much I earn for you versus what you pay me, compared to others.

But now that you mention it, so is the standard of living.

I moved, and never looked back.

At 5/21/2012 9:14 PM, Blogger Hydra said...

When was there ever a union monopoly?

You are correct in pointing out that the union pendulum swung too far. But remember that the pendulum got a big push from previous management excesses.

At 5/21/2012 9:27 PM, Blogger Aiken_Bob said...

Hydra --- having lived and worked in both the north and south I have to say the standard of my living was always better in the south. Sorry you had a bad time -- but to each their own.

At 5/22/2012 12:49 AM, Blogger Abir Mandal said...

I love the south too. Gimme somewhere like Charleston anyday over any city in the NE or left coast.

At 5/22/2012 1:10 AM, Blogger juandos said...

"I wonder when the south will catch up on quality of life issues"...

Such as pricing themselve out of reach for the average person hydra, that sort of quality that is ubiquitous in other 'not south' parts of the country?

Yeah, that's some real quality there...

At 5/22/2012 10:04 AM, Blogger Buddy R Pacifico said...

I don't think the Midwest will win jobs back from the South. The Southern culture has never accepted unions and is atagonistic towards them. The absence of unions is obviously attractive to companies, not needing to add complications to an already fierce business world.

Education is one area where the South has lagged (ex. VA & NC), but this is changing. Over the last decade I am aware of two southern states that have developed excellent programs to support local manufacturing. The Trident Tech system in South Carolina and Alabama's Postsecondary programs.

Skill development, rather than job entrenchment, is the winning approach for competing successfully.

At 5/22/2012 10:17 AM, Blogger Mark J. Perry said...

But if the choice is $14 per hour for union labor in the Midwest vs. $25 per hour in the South, that might be enough of a cost saving to motivate considering production in the Midwest? Maybe firms won't relocate from South to Midwest, but foreign firms entering the U.S. market or exiting U.S. firms deciding where to locate NEW facilities ......

At 5/22/2012 10:24 AM, Blogger Buddy R Pacifico said...

Yes Professor, under the Mid West at $14 vs. Southern $25, that would likely happen. At $14 vs $14though, the South will continue to rise again. :>)


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