U.S. manufacturing employment has declined from a high of 19.5 million workers in 1979 to 11.7 million in May 2011. For many policymakers and much of the media, this is believed to be the result of offshoring: moving U.S. production to low-cost countries in search of cheap labor. In turn, many say the American manufacturing sector has been “hollowed out.” Although supporting arguments are persuasive, they’re not accurate.

Much of the decline in manufacturing employment, no doubt, is attributable to offshoring. But the primary cause is American innovation and automation, which boosted manufacturing productivity to an annual average rate of 3.9 percent from 2000-2007, considerably higher than productivity in the non-farm sector, at 2.6 percent.

The successful implementation of new technologies has empowered fewer workers to churn out more products quicker. What is the result?

From 1979—when there were nearly 70 percent more workers employed in the manufacturing sector—through 2010, American value added output more than tripled, from $545 billion to over $1.7 trillion. We’ve seen these trends before. In 1940, 9.5 million U.S. workers were employed on farms. By 2010, this number fell to 2.2 million. Yet, U.S. agricultural output skyrocketed.

The implementation of new technologies also has caused labor costs, as a percentage of a product’s total cost, to decline to 20-30 percent on average, according to Boston Consulting Group, a business management firm. Susan Helper, a professor of Economics at Case Western Reserve University, says in most manufacturing facilities, it’s more likely between 10-20 percent. What is the impact? As the labor component declines, the incentives to offshore also decline.

Investment Decision Realities

When companies decide where to invest abroad, labor costs are only one of many factors examined. Other considerations, which often are more important, include the availability of skilled workers, productivity levels, the quality of local infrastructure, political stability, rule of law, proximity to key markets, and ability to repatriate profits. That’s why the U.S. remains on top.

With the exception of the year 2003, the United States continues to be the world’s largest recipient of foreign direct investment. And nearly 40 percent goes into manufacturing, according to the Organization for International Investment, a business association in Washington D.C.

But when cheap labor is vital—typically in the production of labor intensive, low-tech products that are relatively difficult to automate—companies have tended to offshore the manufacturing activities to the next low cost country. This trend, which began with the advent of industrialization, observed low-tech production moving from Britain to the U.S., then to Japan, Taiwan, and S. Korea, and more recently to China and other developing countries.

America, which now successfully specializes in higher technology production, began offshoring labor intensive, low-tech production in the 1970s. But a number of new factors are influencing this dynamic.

The Rise of “Backshoring”

In recent years, China has absorbed much of the United States’ and the developed world’s low-tech production. But if U.S. consumers are the primary market destination of this production, as opposed to Chinese or other Asian consumers, the Middle Kingdom may no longer be the attractive manufacturing location it once was. Why?

For several years, Chinese labor rates have increased 17 to 18 percent annually. If sustained, this, combined with a slow appreciation of China’s currency, could result in employment cost increases of 20-25 percent per year, analysts say.

Plus, ever-increasing fuel costs and expenses related to global supply chain logistics and long distance management, as well as capital outlays associated with longer lead times and larger inventories, further reduce China’s low cost advantage. In addition, costs of engineers, purchasing managers and quality control staff traveling to China add up.

As a result, The Boston Consulting Group says within the next five years, the U.S. will experience a “manufacturing renaissance” as the wage gap shrinks between China and low cost American states, such as Mississippi, South Carolina and Alabama. The production of goods that require less labor and are churned out in modest volumes, such as household appliances and construction equipment, will most likely shift back to the U.S., while labor intensive goods produced in high volumes, such as textiles, apparel and TVs, will continue to be made abroad, Boston Consulting says.

Consequently, for many U.S. manufacturers, it makes sense to “backshore” or return previously offshored lower-tech manufacturing to the United States. Mexico, a low cost alternative to China, also may become a beneficiary due to its proximity. And for U.S. producers interested in moving lower technology production abroad for the first time, it’s worth a re-evaluation of their global production and supply chain strategy.

Job Trend Realities

As industrialization emerged, workers once employed in the U.S. agricultural sector began shifting to manufacturing and other emerging industries resulting in higher standards of living and a more prosperous economy. Since the 1970s, workers have been moving into the service sector where the level of sophistication has risen tremendously and corresponding wages have nearly caught up to those in manufacturing. Thus, according to the Bureau of Labor Statistics, in May 2011, average hourly earnings for all employees in manufacturing and private services were $23.68 and $22.64, respectively.

Overall, the vast majority of new jobs are projected to be in the service sector. And although manufacturing may increase in the United States as a result of less offshoring and more backshoring, the number of Americans employed in the sector is unlikely to significantly change in the short term.

This article appeared in Impact Analysis, July-August 2011, and The Buffalo News, July 10, 2011.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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