Despite the conventional wisdom that the South is best place for manufacturing in the United States, eight of the top 10 states for cost-efficient manufacturing are located in the West and Northeast, new research by the American Institute for Economic Research (AIER) shows. The research is discussed in the new AIER Economic Bulletin, "Competitiveness and Business Costs."
AIER Research Fellow Lei Chen, Ph.D., said "The findings explain why manufacturing firms still may want to consider locating their businesses in the Northeast and on the West Coast."
Using 2007 Economic Census data (the most recent data available) and a completely data-driven analysis method, known as Data Envelopment Analysis, Chen found that the most cost-efficient manufacturing took place in Oregon, Connecticut, Iowa, North Carolina, New York, Arizona, Massachusetts, Nevada, Colorado and Washington (see chart). His analysis examined, from an efficiency perspective, inputs including production labor, non-production labor, capital, energy and materials.
The ten states with the least cost-efficient manufacturing, his analysis showed, were Mississippi, North Dakota, Kentucky, Vermont, Alabama, Louisiana, Alaska, Montana, South Carolina and Idaho.
"States that are the most cost-efficient have manufacturing bases that allocate their resources in such a way that relatively low-cost inputs replace high-cost ones, and inputs are used in the most productive manner," said Chen. "If all manufacturers allocated their resources this way, on average, U.S. manufacturers could reduce their total production costs by 15.6 percent and still produce the same quantities of output."
AIER: Production Cost Efficiencies
Chen's findings are consistent with those of an earlier study, also revealed in AIER's Economic Bulletin. That earlier study, which Chen participated in while still on the UConn faculty, provides a state-by-state comparison of the production cost per dollar output of manufactured goods -- that is, how much it cost to produce one dollar value of goods in different states.
That study identified Oregon as the state with the lowest unit production cost per dollar of output. Oregon was followed by North Carolina, Virginia, Arizona and New York.
Wyoming, New Mexico, Connecticut, Missouri and South Dakota rounded out the top 10.
The bottom 10, the states with the highest unit manufacturing cost per dollar output, included Vermont, New Hampshire, Rhode Island, West Virginia, Idaho, Nebraska, Alaska, Michigan, South Carolina and Kentucky.
Arkansas, Louisiana, Mississippi, Tennessee and Alabama -- all of which have become popular manufacturing hubs in recent years -- all had costs in excess of the national average of 83.3 cents per dollar output.
In addition to the top 10, Massachusetts, Pennsylvania, Delaware, Maryland, Colorado, Washington (state), Indiana, Iowa, Connecticut and Missouri all had costs below the national average.
"Given the nation's struggle for a sustained economic recovery, the data from these two studies can help provide guidance for public and private sector decision-makers on ways to improve the performance of the country's businesses."