AMERICA´S TURBULENT JOBS FLIGHT / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( A MUST READ )

July 27, 2011 9:45 pm

America’s turbulent jobs flight

By John Gapper

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The ill-tempered struggle in Washington over raising the federal debt limit is enough to make anyone gloomy about the future of the US. Clive Crook, my FT colleague, rightly contrasts the stasis among politicians with the “unrivalled energy and ambition” of US workers.

Unfortunately, while the former still have full-time jobs many of the latter do not. One reason for the nasty mood on Capitol Hill is the voters’ angst amid a slow recovery that has failed to dent the unemployment rate. It rose in June to 9.2 per cent, leaving 14.6m stranded by the “jobless recovery”.

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I had the chance earlier this month to go and see the American worker in action at two plants in North and South Carolina owned by General Electric, the country’s second-biggest exporter. There was much to admire on the trip – more than in Washington – but little cause for optimism about job creation.

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GE organised the tour for some journalists to show off its high-tech “advanced manufacturing” plants in which it makes jet engines and gas turbines, mainly for export. Jeff Immelt, its chairman and chief executive, now chairs Barack Obama’s council on jobs and competitiveness – an effort to address the jobs deficit.

The two plants were examples of why the US, despite the rise of China, is still a manufacturing power. China’s manufacturing output has just overtaken that of the US (depending on how the figures are counted) but the output of each is still double that of Japan and three times that of Germany, according to IHS Global Insight.

China has achieved that through low-wage manufacturing on a mass scale while the US has driven up productivity – China’s labour productivity is about 12 per cent of the US’s. The American worker is hugely productive, especially in the southern states where plants are mostly non-unionised.

That was on display in Durham, North Carolina where the GE Aviation plant will make 377 jet engines this year, 80 per cent for export. They are assembled by teams of technicians, all of whom study for two years for technical qualifications, and who take charge of designing the assembly line.

Those are attractive jobs – many of the technicians are military veterans – but there are not many of them. The plant is hiring but it currently employs only 330 technicians and 20 supervisors.

Mr Immelt says that each job in GE’s plant in Greenville, South Carolina, where 3,300 workers make turbines worth $25m each, is matched by eight in the supply chain. Even so, these factories are cathedrals of capital intensity and labour productivity, not employment.

“It’s not as if we can say: ‘Let’s have low productivity’,” remarked Mr Immelt as we walked around the Greenville plant. “Let us do this as inexpensively as possible and then I will bust my butt to sell the product in every corner of the world.”

He is right that GE and other companies have no choice if they are to retain US manufacturing plants. But it illustrates why manufacturing employment has fallen by 5.7m in the past decade and why the McKinsey Global Institute’s most optimistic projection is for zero growth in US manufacturing jobs by 2020.

The problem with US manufacturing is not that it has been shrinking – despite the “offshoring” of textile and electronics manufacturing to China, US manufacturing output rose by 3.9 per cent a year between 1997 and 2007. However productivity grew 6.8 per cent annually in the same period, so millions of jobs were lost.

If manufacturing carries along the same path, McKinsey estimates that it could shed another 2.3m jobs by 2020, while the economy needs to create 21m more jobs to return to full employment. The mini-recovery in manufacturing jobs – 164,000 were added in the six months to April – recently stalled.

The best hope is that productivity rises so high that offshoring is no longer worth the effort. As wages in China’s coastal cities have risen, there have been signs of an “onshoring” trend – Caterpillar and NCR are among companies that have expanded manufacturing facilities in the US, and GE has just announced plans for an aircraft engine plant employing 250 people in Mississippi.

Hal Sirkin, a partner of the Boston Consulting Group, argues that the narrowing wage gap between China and the US, combined with higher productivity in the US, will come close to eliminating the cost advantage of China’s coastal cities over US southern states such as North and South Carolina by 2015.

“When Chinese workers were paid 25 cents an hour there was not much to think about, but that equation is adjusting. We have begun to see manufacturing job increases and that is the start of a wave,” he says.

It would be nice to believe Mr Sirkin but I have trouble doing so – manufacturing productivity rose by another 4.2 per cent in the first quarter of this year and the US must add capacity simply to stand still in employment terms. It is especially difficult for the less educated – even many assembly jobs now require two-year degrees.

China is not giving up the jobs fight – although wages in the Pearl River delta have risen, it has pushed production inland. Countries such as Vietnam, Thailand and Indonesia are also taking up the slack.US manufacturing has a good story to tell but that story is about technology and productivity rather than jobs for the millions of people out of work and facing a jobless recovery. While the US worker is laid off, productivity in Washington is likely to stay appallingly low.

Copyright The Financial Times Limited 2011.