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Area Development

Ranked #2: Labor Costs

Ranked second by the respondents to Area Development's Annual Corporate Survey, labor costs figure prominently into a company's ability to compete.

Feb/Mar 06
Labor costs continue to be one of the most important criteria for corporate decision-makers when selecting a new location. While labor costs are important, one could further argue that they are but one component of the bigger issue of work force availability and development that many states are beginning to address. Other related work force issues - such as availability of skilled labor, low union profile, right-to-work laws, and training programs - are also key factors that need to be evaluated when embarking on a site search. The importance of these factors could lead to the conclusion that corporate decision-makers will be placing continued emphasis on locating or expanding in areas that are less likely to have union activity, or that they will be more likely to locate offshore.

Both domestic and foreign-owned companies are continuing to locate facilities in lower-labor-cost and right-to-work states, as well as offshore. In fact, in Kentucky, the Governor and some legislators are proposing right-to-work legislation. And the Governor of Indiana recently said that a company's decision to leave the state might have been reversed if Indiana was a right-to-work state.1

Recent Bureau of Labor Statistics data reveals that manufacturing employees in right-to-work states earn approximately $3,000 a year less than workers in non-right-to-work states.2 For a large manufacturing or assembly plant, these savings are significant and have a major impact on companies trying to remain competitive in the global marketplace. These calculations, in conjunction with workers' compensation costs, unemployment insurance costs, and healthcare costs, are the prime factors considered when doing cross-state comparative analyses with respect to labor costs.

Competitive Pressures
As corporate giants such as Ford, GM, DaimlerChrysler, and - more recently - Delphi grapple with high labor and corresponding healthcare and retirement costs, their facilities in the Midwest and Northeast will likely see continued consolidation. A recent surge of Japanese automotive manufacturing investment south of the Mason-Dixon line has prompted the Big Three to look at further cost-cutting measures in order to remain internationally competitive.

Several southern states faced criticism for paying too high a price on large incentive packages to attract the automotive mega projects. However, due to shifts in market factors, transportation advantages, and lower labor costs, these states and their neighbors are now reaping the benefits of new and expanding investment projects. One would suspect that this migration trend to low-wage states will eventually level out as skilled, available workers are gobbled up and labor costs eventually increase. Until that time, as long as skilled workers are readily available or ready to be trained, a manufacturing shift to the South and Southwest will likely continue.

Offshoring
Offshoring is also likely to continue, particularly if jobs can be shifted overseas at lower wage levels and without significant disruption of business activities or declines in productivity. In the early 1990s, low-skilled manufacturing activities started to shift from the United States toward Mexico. And Ross Perot even said, "Now the shift of jobs to India, China, areas of Southeast Asia, and pockets of Eastern Europe has even impacted Mexico's growth rate."

Thomas Friedman's book, The World Is Flat, describes how many jobs that previously could only be accomplished domestically can now be exported to almost anywhere in the world at a greatly diminished cost. He explains that due to the globalization of business through telecommunications, technology advancements, and intermodal transportation, the playing field has been leveled. With numerous alternatives as to where companies can locate, it's likely that if all other things are equal, they will continue to locate and expand where labor is the least expensive and they receive the best return on their investment.3

Research by McKinsey Global Institute, a think tank, documents that the trend toward offshoring will continue to flourish. Investments in the banking, insurance, accounting, telecommunications, and IT software professions are increasingly likely to take place overseas.4 Evidence also points to the electronics and information-technology industries shifting production activities to countries with lower labor costs.

A South Korean chip company just broke ground on a $600 million wafer fabrication plant in India. The owner of the company said that the Indian market and availability of low-cost skilled labor were two prime site selection factors. China and Singapore have also seen an increase in large electronic production facility investments; IBM's plant location data on recently announced electronics investments shows that China and India rank first and second, with Japan, the United States, and Taiwan rounding out the top five as new facility destinations.5

McKinsey lists the lowest-average-cost countries as India, the Philippines, China, and Malaysia. India has greatly expanded is influence in IT, call center, business research, finance and administration, human resources, and R&D activity. McKinsey's modeling research estimates that although India currently retains the low-wage banner, at the rate that investment and subsequent wages are proliferating there, in several years wage levels will rise and investment activity will shift again to other low-wage nations.

What Does It Mean?
Does this shift in investment to low-wage states and nations spell doom for higher-wage regions? Certainly not; transportation, availability of skilled labor, training programs, and access to market will continue to weigh heavily into the decision-making process. However, it does mean that those areas at the high end of the wage spectrum need to discover innovative methods to promote industry clusters and develop regional strategies to compete, enhancing their educational and work force development systems in order to level the playing field with their low-labor-cost counterparts.

1 Louisville Courier Journal, "Fletcher may push right to work legislation," December 22, 2005.
2 Bureau of Labor Statistics
3 Thomas L. Friedman, The World Is Flat, 2005.
4 McKinsey and Company, The McKinsey Global Institute, The Emerging Labor Market: How Supply and Demand for Offshore Talent Meet, June 2005.
5 Reed-Electronics.com, "The strategic art of international site selection," October 1, 2005.

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