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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.

 

MANUFACTURING
PRODUCTIVITY

UNIT LABOR COST*

 

RI

MA

CT

RI

MA

CT

1986

$17.76

$22.12

$22.40

0.445

0.418

0.449

1987

$18.18

$24.99

$24.53

0.451

0.391

0.426

1988

$19.59

$25.85

$25.62

0.441

0.402

0.421

1989

$21.21

$27.01

$25.89

0.427

0.402

0.433

1990

$22.31

$26.85

$28.60

0.424

0.424

0.403

1991

$23.11

$27.42

$29.26

0.421

0.431

0.410

1992

$22.73

$27.45

$29.61

0.436

0.443

0.421

1993

$23.80

$28.09

$28.64

0.428

0.440

0.454

1994

$23.11

$29.72

$29.76

0.448

0.424

0.455

1995

$23.80

$30.77

$32.29

0.446

0.416

0.425

1996

$25.00

$31.75

$34.98

0.438

0.411

0.400

1997

$25.60

$32.77

$37.26

0.442

0.409

0.388

1998

$27.30

$35.08

$38.50

0.425

0.393

0.385

*Hourly manufacturing wage divided by manufacturing productivity

 

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

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