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OFTEN BURIED,
MANUFACTURING
ENDURES IN RI
The
Providence Business News, October, 2000
A surprisingly large number of Rhode Islanders believe that
manufacturing in this state is dead. As evidence of this, they typically
cite the fact that manufacturing employment here has declined every year
since 1984. The positive aspect of manufacturing for these persons
concerns Rhode Island's relatively low hourly manufacturing wages,
continually among the lowest of any state: they view these as a
positive, reflecting low labor costs that encourage businesses to locate
here.
The first of these beliefs is clearly mistaken. Manufacturing in Rhode
Island is not dead. During times of rising productivity, such as those
we now find ourselves in, it is not valid to infer the health of a
state's manufacturing sector by following employment. After all, the
nature of rising productivity is the ability to raise output with the
same number of or fewer employees. It is not employment that should be
the basis for gauging the health of Rhode Island's manufacturing sector.
The proper focus is the behavior of output and productivity. The more
relevant question is thus whether productivity here is
"adequate," either in terms of its level or how rapidly it is
growing.
The second assertion, concerning wages, is also incorrect. This is one
instance where "common sense" leads to conclusions that are
the opposite of reality. If lower wages necessarily reflect less
expensive labor, then labor in Rhode Island should be much less
expensive than that for either Massachusetts or Connecticut, since wages
in our neighboring states are so much higher than they are here.
The correct determination of whether or not labor is expensive is not
based solely on the level of hourly wages. While wages are clearly a
cost to business, it is necessary to include productivity in the
analysis as well. The correct measure of the cost of labor is what
economists call "unit labor costs:" the ratio of the hourly
wage to productivity. Note that this measure includes both of the areas
that Rhode Islanders have conjectured about. If unit labor costs
are low, then labor is considered to be inexpensive. This means that
wages are low relative to productivity. But, "low" wages do
not necessarily ensure that unit labor costs are low.
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MANUFACTURING
PRODUCTIVITY
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UNIT LABOR COST*
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RI
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MA
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CT
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RI
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MA
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CT
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1986
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$17.76
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$22.12
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$22.40
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0.445
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0.418
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0.449
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1987
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$18.18
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$24.99
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$24.53
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0.451
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0.391
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0.426
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1988
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$19.59
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$25.85
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$25.62
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0.441
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0.402
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0.421
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1989
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$21.21
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$27.01
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$25.89
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0.427
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0.402
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0.433
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1990
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$22.31
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$26.85
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$28.60
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0.424
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0.424
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0.403
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1991
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$23.11
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$27.42
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$29.26
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0.421
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0.431
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0.410
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1992
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$22.73
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$27.45
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$29.61
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0.436
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0.443
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0.421
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1993
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$23.80
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$28.09
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$28.64
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0.428
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0.440
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0.454
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1994
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$23.11
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$29.72
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$29.76
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0.448
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0.424
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0.455
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1995
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$23.80
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$30.77
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$32.29
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0.446
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0.416
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0.425
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1996
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$25.00
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$31.75
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$34.98
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0.438
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0.411
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0.400
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1997
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$25.60
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$32.77
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$37.26
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0.442
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0.409
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0.388
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1998
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$27.30
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$35.08
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$38.50
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0.425
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0.393
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0.385
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*Hourly manufacturing wage divided by
manufacturing productivity
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The columns on the left in the table show manufacturing
productivity Rhode Island, Massachusetts, and Connecticut over the
1986-1998 period derived from Gross State Product (GSP) data: real GSP
in manufacturing per manufacturing hour worked. Note how all three
states experienced productivity growth over this time frame. The bad
news is that Rhode Island's manufacturing productivity has continually
lagged that of its neighboring states. In 1986, for example,
productivity here, or manufacturing output per hour, was $17.76,
versus more than $22 in both of the other states. While productivity in
Rhode Island had improved substantially by 1998, equal to $27.30, the
same was also true for Massachusetts, with productivity of $35.08, and
Connecticut, whose productivity had risen all the way to $38.50.
Are the lower wages in Rhode Island really good news, reflective of
inexpensive labor here? Unfortunately, they are not. In 1998, hourly
manufacturing wages in Rhode Island, $11.61, were well below the values
of $13.80 in Massachusetts and $14.83 for Connecticut. The columns on
the right of the table give unit labor cost for each state, the ratio of
the hourly wage to productivity. Hourly wages in Rhode Island were 42.5
percent of productivity in 1998, giving a unit labor cost of 0.425. The
corresponding numbers were 0.393 for Massachusetts and 0.385 for
Connecticut. Ironically, the higher the hourly wage, the lower was unit
labor cost! So, for 1998, Connecticut, with an hourly manufacturing wage
of $14.83, had less expensive labor than Rhode Island whose hourly wage
was only $11.61.
Rhode Island has made progress in lowering its unit labor costs of late.
In 1998, its unit labor cost fell from 0.442 to 0.425, which places the
cost of labor here more "within striking distance" of that in
either of our neighboring states. But, in spite of this recent growth,
the level of productivity here remains well below that of either
Massachusetts or Connecticut. So, as usual, the "collective
wisdom" about Rhode Island's economy is wrong. While manufacturing
in Rhode Island is not dead, our relatively low manufacturing wages do
not reflect inexpensive labor.
by Leonard Lardaro |
