Economix Blog: When Cheap Foreign Labor Gets Less Cheap

CATHERINE RAMPELL

Dollars to doughnuts.

Nick Wingfield and I had an article in Friday’s paper about how some American companies are “re-shoring” manufacturing they had previously sent abroad. The scale of these efforts is still more anecdotal than widespread at this point. Still, it’s worth examining why the United States might be a more attractive place to locate your plant today than in the past.

Cheap energy costs in the United States (thanks to shale gas extraction), concerns about keeping the supply chain close to the American consumer base, quality control issues and intellectual property concerns have all encouraged American companies to produce at least some of their products at home. But so have rising wages in some manufacturing bases abroad.

Inflation-adjusted average wages in China, for example, more than tripled over the decade from 2000 to 2010, according to a report released Friday by the International Labor Organization.

This table, taken from the report, shows that in Asia, inflation-adjusted average wages have about doubled since 2000. In Eastern Europe and Central Asia, average wages almost tripled:

Growth rates published as “Provisional estimates” (based on coverage of c. 75%). ** Growth rates published as “Tentative estimates” (based on coverage of c. 40%– c. 74%). *** Growth rates published but likely to change (based on coverage of less than 40%). Source: ILO Global Wage Database.

In the developed world, wages are just barely higher than they were in 2000. In the United States, other studies have shown that median household income is lower today than it was in 2000.

That does not mean that American wages are anywhere close to those in countries in East Asia or other places where American imports come from. As of 2010 (the latest year available), hourly compensation costs for manufacturing in the United States were about four times those in Taiwan, and 20 times those in the Philippines, according to the Labor Department.

But the narrowing of that wage gap does mean that the labor cost advantage some of these other countries have enjoyed is eroding a little, particularly if there are other cost-based advantages to producing in the United States (like access to cheap natural gas or being closer to your consumers).

“I’m going to sound like an economist talking here, but in a way it’s good news that U.S. wages are going down, because that’s making us more competitive year to year,” said Torsten Slok, chief international economist at Deutsche Bank Securities.

On the other hand, as wages in many developing countries rise, companies also have a big incentive to automate more of their production.

The most valuable part of each computer, a motherboard loaded with microprocessors and memory, is already largely made with robots, according to my colleague Quentin Hardy. People do things like fitting in batteries and snapping on screens.

As more robots are built, largely by other robots, “assembly can be done here as well as anywhere else,” said Rob Enderle, an analyst based in San Jose, Calif., who has been following the computer electronics industry for a quarter-century. “That will replace most of the workers, though you will need a few people to manage the robots.”

Article source: http://economix.blogs.nytimes.com/2012/12/07/when-cheap-foreign-labor-gets-less-cheap/?partner=rss&emc=rss