The Impact of Rising Labor Costs on US Manufacturing is playing a role in driving jobs overseas, but there are positive indicators for how the US can respond to this growing trend.
In the third quarter of 2015, the cost of labor rose .6%, according to recent data from the US Bureau of Labor Statistics. Civilian labor has risen 1.9% over the past year, and benefits have risen 1.8%. In the private sector, wages and salaries increased 2.1% and benefits 1.4%. Meanwhile, the cost of healthcare rose from 2.6% in 2014 to 3% in 2015. And 14 states implemented higher minimum wages at the beginning of 2016. Although in some regards these numbers are positive, on the other hand, the impact of rising labor costs on US manufacturing have created some negative effects in the sector.
These numbers have caused a stir among executives within the manufacturing community, as many feel that it is becoming increasingly difficult to increase profitability for domestic manufacturing operations due to the palpable impact of rising labor costs on US manufacturing that is being felt. According to recent surveys, most CFOs identify reducing direct/indirect costs as a top priority in the near future and say improving efficiency is a primary goal.
Some companies have moved manufacturing offshore, many to nearshore Mexico, in order to reduce labor costs. But simply reducing the labor cost does not necessarily mean increased profitability. Among the many factors that could also play a role in this equation are:
- Transportation costs
- Environmental issues
- Quality assurance
Even still, with labor costs making up only one of the most significant costs for determining profitability, many companies feel the need to relocate their production facilities outside of the US. Yet relocation does not necessarily impact the US economy negatively.
The Mexico-US Partnership
Relocation doesn’t have to involve offshoring to China, which might be considered a net loss for the US manufacturing economy. Many companies are choosing rather than moving to far-flung venues are choosing to nearshore just south of the border. Much has been written about the ways in which the US and Mexico are intricately linked when it comes to the manufacturing economy. Rather than competitors, the two countries work together more like regional partners.
Consider the following:
- 40% of the value of US imports from Mexico comes from the US.
- Automobiles manufactured in North America have their parts cross the border approximately eight times during the manufacturing process.
- Companies exiting China are more likely to reshore engineering jobs to the US and skilled manufacturing jobs to Mexico to take advantage of their respective strengths in cooperation.
Mexico and the US partner in many ways, including foreign direct investment, joint ventures, new sales and distribution offices, and shared R&D facilities. While the impact of rising labor costs on US Manufacturing is undoubtedly being felt, Mexico has maintained a low cost for skilled labor for two decades. This mutual cooperation between the two North American countries could mean that profitability for US companies is simply a matter of exercising this relationship to its fullest.