Reposted from Reuters

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Lack of national policy hobbles U.S. manufacturing: study

Lucia Mutikani  |  Reuters  |  February 27, 2012

ASHINGTON (Reuters) – Lack of a public policy on manufacturingis the main obstacle to a vibrant factory sector in the United States, according to a study which also dismissed the notion that high wages are frustrating growth.

The study by the Metropolitan Policy Program at the Brookings Institution comes amid a push by both politicians and business groups to put factories at the center of the economy.

But these efforts could fall flat without a framework similar to that in countries like Germany and Canada where factory job losses have been minimal.

“There is lack of political will to do anything about it and that has been true for a long period of time,” said Howard Wial, an economist and fellow at Brookings. “We let manufacturing shed jobs and we let offshoring happen to a much greater degree than almost any other advanced country.”

Manufacturing lost dominance in the economy in the 1980s as companies shipped work to low-cost countries in Asia, particularly China. Between June 1979 and December 2009, the country lost 41 percent of its manufacturing jobs, the study said.

The loss of factory jobs worsened further, with manufacturing’s total share of employment falling to 8.9 percent in December 2009 from 13.2 percent in 2000.

“Countries in continental Europe as well as Canada are performing much better. They shed much fewer jobs, particularly over the last decade and many have higher wages,” said Wial, who co-authored the study, told Reuters.

“They have policies and strategies for trying to retain manufacturing jobs and higher wages, and we really don’t.”

LESSONS FROM GERMANY

While German manufacturing employment contracted only 2.2 percent between 1990 and 2000, factory jobs in the United States fell 7.8 percent.

Between 2000 and 2010 factory jobs in Germany dropped 6.0 percent compared to a hefty 28.3 percent in the United States.

Manufacturing allows Germany to maintain a trade surplus, something that the study said the United States could emulate to address its huge trade deficit.

“Germany’s manufacturing success is not accidental; public policy has played an important role,” said the study.

It noted that the federal government in Germany has facilitated rich networks for research and development, and workers and employers benefit from a system of continuous vocational training.

Firms also enjoy stable access to finance, the study said.

“Sturdy worker protections ensure that instead of solving problems through short-run cost-cutting, German employers and unions work together to adopt high-road solutions that strengthen firm competitiveness in the long term,” it said.

The study said hoping that the sector will bounce back and grow on its own once exchange rates find their correct level was misguided optimism. It noted that it was very difficult to revive an industry after its sales and employment have dramatically shrunk.

“The frayed production networks in such industries as tooling and electronics should be cause for great concern. The sooner the United States acts to shore up its manufacturing sector, the easier it will be,” it said.

U.S. factories are regaining some of their lost glory and played a key role in lifting the economy out of the 2007-09 recession. Manufacturing employment rose 225,000 last year, sustaining gains for the first time since 1997. But this is just a drop in the ocean.

“The recent manufacturing job gains pale in comparison to the losses since 2000,” the study said.

“At the rate of manufacturing job growth that the nation has seen since December 2009, it would take until 2037 for the nation to regain all the manufacturing jobs it lost between January 2000 and December 2009.”

PENT-UP DEMAND

Most of the gains in employment have been in industries that manufacture goods intended to last three years or more.

These have been attributed to pent-up demand after the recession, a bounce back in auto production and rising wages in China following a small increase in the value of the yuan since mid-2010.

The study said the modest job gains were likely to continue, but warned there was little confidence that the trend would strengthen without major policy changes.

It dismissed the argument that high wages and rapid growth in productivity were the main causes of job losses. The study found manufacturers in other industrialized nations pay significantly higher wages than in the United States.

The most recent data from the Bureau of Labor Statistics shows the United States trailing behind 12 European countries and Australia.

“Contrary to some popular arguments, then, it is not high wages that prevent manufacturers from retaining or expanding employment in the United States,” the study said.

“Countries where manufacturing wages are higher than in the United States have not lost manufacturing employment more rapidly than the United States.”

Even as manufacturing employment has been growing, inflation-adjusted hourly factory wages in manufacturing fell between December 2009 and September 2011.