Structural Costs Hampering U.S. Manufacturing Growth

Manufacturing study finds rise in non-wage costs prevents job creation and R&D investment.

The increase in structural costs for the U.S. manufacturing industry is preventing the creation of new manufacturing jobs and curtailing investments in R&D and employee training, according to a study released Wednesday by the National Association of Manufacturers (NAM), The Manufacturing Institute and the Manufacturers Alliance/MAPI.

In domestic manufacturing, the structural costs have risen from 22.4 percent to 31.7 percent since 2003 compared to nine major trading partners. This increase in costs is the major finding of "The Escalating Cost Crisis," a new study by economist Jeremy Leonard of MAPI that updates the 2003 study, "How Structural Costs Imposed on U.S. Manufacturers Harm Workers and Threaten Competitiveness."

The study, using the same methodology as three years ago, analyzed five structural, non-production costs including corporate tax rates, employee benefits, legal costs, natural gas prices, and pollution abatement.
“The sharp rise in these non-wage costs represents a significant and long-term problem for our nation’s manufacturers and America’s economy,” said NAM's president John Engler.
“This is an astonishing increase from just three years ago,” commented Leonard.  “Because of these escalating costs, fewer new manufacturing jobs have been created and less is available to invest in research and development and worker training.”

The corporate tax rate was both the highest burden and the largest contributor to the increase in structural costs, responsible for more than one third of the increase in the cost burden.  While the corporate tax rate has remained the same since then, some trading partners have lowered their statutory tax rates, thus widening the gap and undercutting U.S. manufacturers.

“By standing still, the United States is falling behind,” Engler said.

“When we issued the original cost study in 2003, manufacturing was just starting to climb out of a severe three-year recession,” said Jerry Jasinowski, president of The Manufacturing Institute, the research and education arm of the NAM.  “While business is stronger today because overseas markets for U.S. products are growing again and business investment at home has rebounded, the underlying pressures that make it difficult to manufacture in the United States have not abated.”

In the mid-1990s, when natural gas prices cost, on average, 30 percent less than the nine major trading partners, this was a competitive advantage for U.S. manufacturers.

But in 2005 the advantage turned into a competitive disadvantage, as the average cost of natural gas for the nine major trading partners was 0.7 percent below the price paid by U.S. manufacturers.

Engler is hoping that the report will convince policymakers to open new sources of natural gas.

The NAM believes that a comprehensive national energy policy to expand use of domestic sources, will lead to lower energy costs.  New domestic sources will improve competitiveness by cutting the 31.7 percent cost disadvantage.

According to the study, pollution abatement costs are also adding to the cost burdens of the U.S. manufacturing industry.

Pollution abatement costs have increased by 11.5 percent since 2000, to approximately $77 billion in 2004, increasing the U.S. excess cost burden by 1.7 percentage points relative to its major trading partners. 

“Much of this burden is not recognized by the Environmental Protection Agency (EPA) when preparing its estimates of the benefits and costs of its regulations,” Engler said.  “These contribute to grossly overstated benefits-cost ratios."