The surging cost of energy has contributed to a decline in manufacturing workers' real wages, according to an annual report on the state of the manufacturing economy from the National Association of Manufacturers (NAM).
"While overall real compensation is rising, wages are not," the NAM says in its "The State of the American Workforce" Labor Day report. "The rising cost of benefits such as health care -- which are continuing to consume a large portion of workers' pay checks -- is partially responsible for the decline in real wage growth.
"However," the report continues, "the recent surge in energy prices is the main reason why workers' wages have not kept pace with inflation." That surge between November 2001 and May 2006 includes natural gas prices that doubled to $7.90 per million BTUs, oil prices that quadrupled to $65 per barrel, and gas prices that rose to more than $3 per gallon, increases that have directly affected workers of all stripes.
According to the Department of Labor, those increases caused the consumer price of energy to jump 80% between November 2001 and July 2006, which NAM defines as the current economic expansion. This surge in energy prices has eaten into workers' paychecks and reduced their real wages by 0.6% across the board, the report found. Manufacturing workers have been harder hit; their wages have declined 1.7%, NAM says.
The report says that but for the corrosive impact of rising prices, manufacturing workers' earnings would have risen 2.2% since the 2001 recession, while earnings in the private work force would have risen 3.3%.
"Moreover, when energy prices are removed from inflation, real wages would be growing faster during this current expansion than during any of the prior three recoveries," the report states. "While this highlights the underlying strength of the current labor market, it at the same time illustrates how vulnerable the economy is to the volatile global energy market, which has become an increasing burden on working Americans."
For the manufacturers who employ the workers, however, the picture is healthier.
Led by double-digit growth in computer and electronic products, primary metals, aerospace, and electrical equipment production, overall manufacturing output has increased by 5.8% in the past year. This is the fastest year-long increase in manufacturing production in the six years since the sector slid into recession in the second half of 2000, according to the report.
Specifically, 14 of the 22 major manufacturing sectors have surpassed their pre-recession level of production. And, even though sectors such as apparel, textiles, and leather products have not experienced meaningful recoveries, the overall state of manufacturing has improved in the last year, the report found. The level of manufacturing production, even excluding the effect of the surging high-tech sectors, the NAM says, is at an all-time high. This state of affairs owes to a 22% surge in manufacturing productivity since the 2001 recession.
While productivity has been up, so, too, has employment. According to the report, "manufacturing production employment (jobs on the factory floor) has increased for 10 consecutive months -- the longest string of consecutive monthly gains in nine years."
The last year has seen particularly strong growth, the report says. "Over the past 12 months, production employment has increased by 170,000 -- the largest number of jobs created over a 12-month span in eight years." Three-quarters of that increase has been concentrated in computers and electronic products, transportation (excluding motor vehicles), fabricated metals, and machinery.
However, those ups have been tempered by some downs. The current manufacturing recovery has not been as robust as its predecessors. The employment recovery lagged the economic recovery by 21 months, making it the slowest in three decades. And manufacturing output did not begin to surpass the pace of productivity until this year, meaning that manufacturers only recently have been expanding employment.
According to the NAM, there is a disconnect between the strong productivity numbers -- which have helped workers -- and the general financial outlook for those workers, mainly because of the effect of energy costs.
"Historically, worker productivity has been closely connected with pay: higher productivity leads to higher real incomes and a better standard of living for American workers," the report notes. "Overall productivity has grown 58% faster than the average pace of the prior recoveries and has increased a solid 2.4% over the past four quarters.
The report says that gains in productivity have translated into increased real compensation for manufacturing employees. "Over the past year, non-farm business real hourly compensation has increased 1.7%. And throughout the current economic expansion, real compensation is up more than 6% -- fully a third (35%) faster than the average increase over comparable periods during the prior three upturns. For manufacturing, real compensation has increased by 10% over the 18 quarters since the fourth quarter of 2001, more than double the average of the prior three quarters."
All those glowing numbers, however, haven't been enough to outpace the high costs of energy, according to the NAM.
With energy costs high and likely going higher, some manufacturers have taken a more critical look at their consumption and spending. (See "Taking the Shock out of Energy Prices" from MA's July issue.) But what about next year? Or next decade?
The NAM report offers some answers:
- Maximize domestic explorations and production of energy.
- Increase further efficiencies and conversation by improving the utilization of existing fuel sources.
- Massive investment in research to develop new fuels, new technologies, and alternative sources of energy.
- Reform the regulatory process to facilitate domestic energy production, innovation, and the implementation of new technologies.
"As Labor Day 2006 arrives, America's manufacturers know we can cooperate and make our economy less dependent on foreign energy sources and less vulnerable to the negative consequences of energy-induced supply shocks, which have been painfully all-too-evident to the American worker over the past year," the report concludes.