Manufacturing's Great Salary Divide

Skilled workers’ wages could grow as manufacturing returns to the United States.

By Eric Krell Nov 1, 2012
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1112cover.gif"Not long ago, many companies regarded China as the low-cost default," notes Michael Zinser, a Boston Consulting Group (BCG) partner. "The U.S. is becoming more competitive."​

Zinser and his colleagues' research on wages, productivity, and logistical and hidden costs related to overseas operations indicate that a "tipping point" is fast approaching. Soon, they predict, the economics for many manufacturing subsectors—computers and electronics, appliances and electrical equipment, machinery, furniture, and more—will swing in favor of the United States and away from China and other low-cost countries.

Is the relatively low growth of U.S. manufacturing wages responsible for a coming wave of "reshoring"? Partly. BCG's research illustrates how strategic manufacturing decisions hinge on a portfolio of factors.

In 2005, the U.S. average manufacturing wage rate was 23 times higher than that of China, according to an analysis conducted by the Economist Intelligence Unit, the U.S. Bureau of Economic Analysis and BCG. Today, the U.S. figure is around 11 times higher. By 2015, the average U.S. manufacturing wage is projected to be only six times higher than China's. However, when wages are adjusted to include the high rate of U.S. productivity among manufacturing workers, that gap shrinks to 2.3 times higher than in China.

As workforces mature in emerging markets—in part by adding technology and efficiency to their processes—their wages increase. Manufacturing wages in China are expected to increase by an average of roughly 18 percent annually for the next several years, according to BCG.

Add shipping, other supply chain costs and hidden costs to total labor costs, and "many companies will find that making products in China that are destined for the U.S. will bring only marginal cost savings and that manufacturing these products in the U.S. may be more economical," Zinser and his colleagues write.

Opposing Influences

Opposing dynamics often govern manufacturing. "There is an interesting push and pull," explains Cliff Waldman, senior economist with the Manufacturers Alliance for Productivity and Innovation in Arlington, Va. Growing need for skilled workers is placing upward pressure on wages. At the same time, globalization is pushing wages down.

Liz Beasley, SPHR, senior manager of compensation for Continental Automotive Divisions, North America, and Continental Tire, the Americas, in Auburn Hills, Mich., experiences this push and pull regularly.

"We have a growing need for skilled trades," says Beasley, whose German company's U.S. workforce numbers more than 9,500 employees. She reports that multicraft, higher-skilled maintenance positions are becoming difficult to fill, pushing wages up. In contrast, relatively unskilled but trainable general assembly workers are "fairly easy to find and hire."

Add still-high unemployment and an apparent skills gap to the mix of opposing compensation influences, and the result is that competition is growing for higher-skilled positions and most jobs involving science, technology, engineering or math.

Sluggish Wage Growth

Yet "manufacturing wage growth in the last five years has been fairly stagnant," reflects Jeff Lupinacci, global director of human resources at Kimberly-Clark International.

Preliminary figures from the U.S. Bureau of Labor Statistics indicate that average hourly earnings for all U.S. manufacturing employees in August was $24.01, a meager 1.3 percent increase compared to a year earlier.

In response to the recession, many employers reduced costs significantly to remain competitive or even to stay in business, reports Bob Cartwright, SPHR, president and chief executive officer of Texas-based consulting firm Intelligent Compensation LLC.

At many plants, the slow growth of shop floor wages extends into functional areas and throughout much of the organizations. For example, the professional ranks of Dallas-based Kimberly-Clark's U.S. workforce of 25,000 received, on average, a 1 percent salary increase in 2011.

The Society for Human Resource Management's monthly Leading Indicators of National Employment (LINE) report signifies the severity of the global downturn and the magnitude of the cost cutting. During and immediately following recessions, compensation paid to new hires typically remains flat; however, LINE reports—which reflect responses from HR executives at more than 500 manufacturing and 500 service-sector companies—indicated that compensation for new hires in fact dropped throughout much of 2009 and into 2010.

New-hire compensation is a leading indicator of wage growth for the workforce, notes Jennifer Schramm, GPHR, manager of the workplace trends and forecasting program at SHRM. And the low new-hire compensation data for 2009 and 2010 were mirrored in the paltry wage rate increases U.S. manufacturers subsequently delivered.

The August, September and October LINE reports for 2012 suggest that overall employment conditions—the number of jobs and wage increases—may be improving, but the pace of improvement is much more of a crawl than a run or even a jog.

The Skills Gap and Wages

Compensation for positions that require higher-level skills, or a combination of skills, are showing much higher wage growth, in part because employers generally are having a more difficult time filling these positions.

The supply of U.S. candidates to fill lower-skilled production jobs remains high, notes Han Hu, a Washington, D.C.-based senior associate at Mercer. Hence, the median annual base salary for an associate production technician increased only 1.1 percent, from $27,000 in 2011 to $27,300 in 2012, according to Mercer's 2012 Manufacturing Compensation Survey, which reflects data from 1,794 responding U.S. companies.

Meanwhile, the supply of manufacturing engineering talent, as well as some higher-skilled production labor, is not as bountiful. As a result, "some of the higher-skill jobs are experiencing wage increases," reports Matt Sandler, a Philadelphia-based Mercer principal. Mercer's salary survey demonstrates this: The median annual base salary for a senior mechanical engineer rose from $84,200 in 2011 to $87,960 in 2012, an increase of 4.5 percent.

The difference in the growth of median total cash compensation—base pay and bonuses—for these two positions is even more dramatic. Median total cash compensation for senior mechanical engineers increased 6.6 percent, from $86,000 in 2011 to $91,714 in 2012, while median total cash compensation for an associate production technician remained unchanged at $27,600 during that time.

Pam Paglino, human resources manager of salaried personnel for Ford Motor Co. in Dearborn, Mich., acknowledges that higher-skilled manufacturing employees have always received higher compensation—and often increases at a higher rate—compared to employees in less-skilled production and assembly positions.

Paglino notes, however, that the nature of automotive manufacturing as well as U.S. manufacturing as a whole is changing. The introduction of new manufacturing technology requires more workers across job categories to apply greater technical, engineering and math skills.

"Even with our hourly positions, we are looking for a much more technologically sophisticated and educated person," she explains.

Paglino expects compensation for technical manufacturing jobs to increase more dramatically than compensation for less-technically demanding jobs.

Waldman predicts a similar scenario. "There is going to be a growing gap between the wages of skilled and nonskilled manufacturing workers," he says.

Wage Pressures

The U.S. manufacturing industry has undergone a transformation. Total manufacturing jobs and total union members have declined steeply over the past 10 years, while productivity has increased 32 percent. These number among the many facets of dramatic change that affect compensation.

Since 2003, for example, the total number of U.S. manufacturing employees decreased 24 percent and now stands at about 12 million. However, the industry has grown quietly since January 2010, adding roughly 500,000 jobs.

In 2011, only 10.5 percent of U.S. workers belonged to a union, down from 14.6 a decade earlier. Union members, on average, earned 7.2 percent higher median weekly earnings than nonunion members in 2011.

"Even if the unions do not have as many members as they once did, they are still a major influence—and they are top of mind here," notes Ford's Paglino. "One of the first questions we ask concerning compensation discussions is 'Have you thought about how the union might respond?' "

Many other manufacturers, however, have closed union factories. Continental's Beasley has worked for three automotive equipment suppliers. Each one closed nearly all of its union facilities.

"Factor price equalization" plays a crucial role in compensation, also. This economic term refers to the tendency for input prices—including wages—to level as global markets open. Low manufacturing wages in China, India and other emerging markets continue to drive down U.S. wages.

Overcoming the Skills Gap

Productivity, supply chain challenges and climbing foreign wages help explain why 37 percent of U.S.-based manufacturing executives surveyed in February by BCG indicated that their companies are planning to move operations from China to the United States, or are actively considering doing so. This research supports BCG's estimate that reshoring could add as much as $120 billion in annual output to the U.S. economy and create as many as 750,000 manufacturing jobs in the next decade.

In 2013, German manufacturer Continental AG will open its first U.S. tire factory since the 1970s. The Sumter, S.C., plant will eventually employ 4,000 workers. South Carolina is a right-to-work state where, despite relatively low wages, employees cannot be forced to join or financially support a union. South Carolina also has shipping ports, offers tax incentives and has readySC, a public-private endeavor designed to help employers find and train workers. Most of the area's community colleges participate in readySC and will provide Continental-specific training to fill the skills pipeline with candidates ready to hit the shop floor.

Will a U.S. manufacturing renaissance and growing demand for technically savvy manufacturing talent, combined with Baby Boomers' retirements, hamper employers' ability to fill these potential jobs? Not likely, Zinser says. He describes the skills gap as a manageable challenge confined so far to specific types of manufacturing skills in specific industry segments and geographies.

Cartwright says smarter employers are addressing the skills gap by "spending the dollars necessary to educate and train their workforces."

Besides, the United States—thanks to its workforce, education system, productivity, and proximity to consumers and business-to-business customers—remains an attractive location.

That allure may be cause for cautious optimism. Projections for manufacturing job growth remain ripe for change—even dramatic modification—given the volatile nature of the global economy.

3 Steps to Monitor Wage Rates

All manufacturers should closely monitor the cost of new labor, says Liz Beasley, SPHR, senior manager of compensation for Continental Automotive Divisions, North America, and Continental Tire, the Americas. She identifies three ways she and her team keep tabs on changes in the labor supply and costs:

Purchase compensation data. Beasley's company subscribes to a quarterly compensation data service provided by the Economic Research Institute. The data give Beasley and her team detailed wage rates, including the rates in the counties where the company operates factories in the United States. Similar data are available from other sources, including the Society for Human Resource Management's Compensation Data Center, which provides Society members custom salary information.

Conduct competitive analyses. Continental compares the compensation data it purchases to ad hoc internal benchmarks. Getting that information can be a challenge, however. "The tire industry does not share a lot of data," Beasley reports. "The automotive industry does, though."

Work with economic development agencies. Beasley and her team work with state, county and city economic development officials to share current information on average hiring wages as well as the size and quality of local labor pools.

The Manufacturers Alliance's predictions for 2012-13 manufacturing job growth suggest that what Waldman calls the "hopeful turn" of 2010 and 2011 will continue: Forecasters expect the United States to add 208,000 manufacturing jobs in 2012 and 213,000 in 2013. Nevertheless, because of economic uncertainty and social unrest, Waldman cautions, "the global situation remains risky."

The author is a business writer based in Austin, Texas, who covers human resource, finance and social marketing issues.

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