This Week's Herman Trend Alert

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  The Herman Trend Alert

November 29, 2006

Manufacturers Being Squeezed

In the United States and elsewhere, structural (non-wage) costs for manufacturers, as a percentage of the total costs, are continuing to rise. According to a study released September 2006 by the U.S. National Association of Manufacturers (NAM), The Manufacturing Institute, and the Manufacturers Alliance/MAPI, structural costs increased from 22.4 to 31.7 percent of the total costs, compared to similar costs for similar companies in nine trading partner countries in 2003. “(This) sharp rise in these non-wage costs represents a significant and long-term problem for our nation’s manufacturers and America’s economy,” said John Engler, President of the NAM.

These increasing structural costs harm workers and threaten competitiveness because they prevent job creation and take valuable funds away from research and development and worker training. Without investment in these three areas, manufacturers cannot realize growth.

While manufacturing has rebounded from the protracted slowdown of the early 2000s, the underlying pressures on U.S. manufacturers have not abated. Surprisingly, the largest contributor was the corporate tax rate, responsible for one-third of the increase.

Higher energy costs also contributed significantly to this challenge for U.S. employers. Historically---in the mid 1990s, natural gas pricing had been a competitive advantage for these companies, costing on the average 30 percent less than the trading partners had faced. As the average cost of natural gas for the nine major trading partners shifted to 0.7 percent below the price paid by U.S. manufacturers in 2005 that competitive advantage flipped to a disadvantage.

Other increasing structural costs include those for pollution abatement. Since the year 2000, these costs were found to have increased by 11.5 percent, increasing the U.S. excess cost burden by 1.7 percentage points relative to its major trading partners.

Add to all of these increasing costs, escalating costs in insurance benefits and it’s easy to understand the predicament in which U.S. manufacturers find themselves. Many are struggling to embrace technology fast enough to make these differences. The problem is that embracing technology requires upskilling the labor pool and those funds have been reduced, rather than increased. Expect these costs to continue to rise across the developed world.

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