Rural Technology and Transportation
Issue
Recently, I traveled to a remote region of western North Carolina. The only communication technology provided by the local motel was rabbit-ear TV! Cell, telephone (old school), Wi-Fi, cable and Internet (smart phone, computer, iPad) service were not available. But communication was not a problem since there were plenty of guns and ammunition around.
But seriously, I wonder if there is still a technology – communication or otherwise – gap as first reported by the United States Department of Agriculture (USDA) in 1997. That report, titled “Is There A Rural-Urban Technology Gap“, analyzes the technology gap between rural and urban areas.
Analysis
Without the benefit of a follow-up report, I speculate there remains a technology variance between rural and urban areas. However, the main culprit may not be the lack of desire to invest in technology itself but, instead, transportation costs associated with both the cost of manufacturing (cost of goods sold – import parts) and the cost to ship the finished product from the manufacturing facility. It is these transportation costs that determine the type of product that can be competitively produced in rural areas? Important to this conversation is that capital investment in the production process does not reduce these costs. Ultimately only plant location and/or plant capability (rail, water, truck) can lower them.
Early in my manufacturing career, we built a plant that was designed to ship 80 percent by truck and 20 percent by rail. After being in operation for a few years, the plant was shipping 80 percent by rail and 20 percent by truck. A significant plant upgrade along with a rail extension was necessary to make this possible, but it made an immediate profitability impact through the reduction of transportation costs of both raw material and finished goods. Ultimately this cost reduction lowered the cost per unit and made us more competitive in the market place. The cost advantage remains in place to this day.
Conclusion
Today advanced technologies can be found in most communities. What is not always available is a cost-competitive transportation model used to import manufacturing components and ship finished goods. Small rural communities may give a boost to their economic development efforts by eliminating this barrier for current and future businesses.
Note: As we left western North Carolina, on the side of a remote road was parked a classic Airstreamer with a sign that stated it had full Wi-Fi access – but there was no tow vehicle hooked up to pull it down the road!
Manufacturing: Decline or Revitalization?
Issue
The Post and Courier recently printed an article from the Associated Press on the national economy. It is an interesting article in that unlike many articles of this type, there is a limited amount of talk, and actually some interesting data. Unfortunately, most of the data points were taken out of context and in one instance actually mislead the reader. Of particular interest are the manufacturing data.
Manufacturing Expansion – NOPE!
The data which were quoted appear to be from the U.S. Census, but are actually from the Federal Reserve Board.
“U.S. manufacturing output expanded in May at the slowest pace in 20 months”
Actually manufacturing declined* by -0.4 percent. The Federal Reserve goes on to explain these data in more detail:
“In April (2011), manufacturing output fell 0.4 percent after increasing 0.6 percent in March. The rates of change for manufacturing were also revised down for both January and February; lower estimates for the production of cigarettes, petroleum products, pharmaceuticals, microprocessors, and military aircraft contributed to the downward revisions. The index for manufacturing in April was 4.6 percent above its year-earlier level. Capacity utilization for manufacturing moved down 0.4 percentage point to 74.4 percent, a rate 10.0 percentage points above its trough in June 2009 but still 4.6 percentage points below its average from 1972 to 2010.”
Analysis: Wish the Late 80s Were Back
When evaluating manufacturing, two important measurements are production and capacity utilization (CU). Production (Federal Reserve, St. Louis) had been increasing since the end of the recession. Because this trend was broken well before reaching production output established late in the past decade, April’s release was disturbing.
More troublesome however, is the continued long term slide in CU. Fortunately, we rebounded from the recession in this statistic too, but again the numbers seem to be leveling off. Most manufacturers operate best when they run between 80 to 83 percent of full capacity. Any number higher than this typically means that the manufacturer has to bring old, less efficient equipment on line. So although there is an increase in production, efficiencies actually drop. In addition, high CUs tend to dominate the business model, leaving other areas of the business to suffer, such as quality (think Toyota).
Unfortunately, this is not our current problem. The current state of production is low capacities resulting in machines sitting idle, workers being laid off and budgets being reduced – all of which are a real drag on the recovery. So how do we get back on track?
Solutions
Solutions to America’s long term decline were the subject of a paper by Timothy J. Bartik, “Thoughts on American Manufacturing Decline and Revitalization” back in 2003. He outlines six ways to support manufacturers. We have noted these suggestions over the years but maybe now, as a result of hitting a manufacturing ceiling, it is the time to take a hard look at policies such as retraining, capital formation and access to information to improve this industry’s competitiveness.
For the best information on the economic indicators, see The Federal Reserve Bank of Richmond (National Economic Indicators)
*See Major Industry Groups Manufacturing (April)
Michael Porter vs States Governor’s
This is a great article from Martin Schram on states budget deficits and productivity. Dr. Michael Porter told the governors productivity, “sets standard for whether your particular state is going to succeed.” ”If you are productive you can be prosperous. If not, you can’t.” To be productive a state needs to invest in education and infrastructure. If not they will be regulated to the back of the pack both nationally and globally!
Occupational Wage Data: Let’s Get it Right
Issue
Recently there has been a rash of articles in which someone is trying to make arguments for reducing salaries of some other class of workers’ salaries – but not their own! The Bureau of Labor Statistic (BLS) is the natural choice for those who wish to quote wage and salary information. Unfortunately, without exception, BLS salary databases have been mixed-up, misused or are simply the wrong data set to make the point.
NCS vs OES
The two most common databases for wage and salary information are the National Compensation Survey (NCS) and Occupational Employment Statistics (OES) programs. Both of these surveys (Technical Note on Survey Error) provide information on wages and salaries by occupation, but each has different strengths. Primarily, the OES is the larger survey and can provide a greater range of occupations and areas, while the NCS is conducted by personal visit and can provide greater depth by obtaining occupational work level.
The BLS states:
“the NCS occupational work level is based on the duties and responsibilities of the job. An architect, for example, who directs a major project would typically be more highly compensated than an architect preparing a small part of a project under direct supervision. To determine these ‘levels of work,’ each occupation is evaluated using four factors. This system also allows for pay comparisons to be made across occupations (for example, comparing architects to accountants with similar levels of responsibility).”
Two other primary differences stated by the BLS include:
“1) the OES provides information for more different occupations. The NCS, on the other hand, provides information on the wages for the occupations it covers at specific levels of work, rather than just an average for all workers in the occupation.
2) the OES provides information for the nation, for states, and for all metropolitan areas. The NCS provides information for the nation, for selected metropolitan and nonmetropolitan areas and for the 9 Census divisions.”
National vs. Local Data
As an analyst, I prefer to start with national data, which frames the question and provides a reasonable and defensible position when it comes to wages. Local wage data then provides specific detail within that framework. It is important to understand the difference in wages levels, median and mean wages, so as not to confuse the reader or end up comparing apples to oranges.
Conclusion
Unfortunately most of the “cut to greatness” articles are missing the real problem, which is productivity. See Productivity. It is easy to pontificate about wages, but for sustained growth, lower costs and increased value delivered, productivity, the education and tools that help people perform, needs to increase.
Productivity, Wages and Demand
Productivity and Wages: Successful Business Partners (PDF)
“Productively measures how efficiently economic inputs are converted into output, which are the goods and services that business sells. So when more is produced with the same or less we can increase income (that is value added) and potentially increase profit.”
Productively has one underling assumption, demand. If there is no demand then productively is not a factor. If demand declines, similar to our current situation, productively is everything. We see companies trying to deal with lack of demand by laying off large numbers of employees. Those left, do work harder and longer hours, but likely are producing significantly less as a result of decreased demand. This is one of the reasons wages are flat, there is simply no way to increase prices even-though everyone is working harder.
Productivity and Wages: Successful Business Partners
This paper provides a sample calculation which demonstrates how to think about wages and productively when plugged into your demand formula.
Sources:
Bureau of Labor Statistics – Productivity
CEPR – Price Byte
Unemployment and Productivity
Productivity Enhances Job Growth
The Post and Courier recently published an article on unemployment and productivity. The article suggests that productivity is a cause of unemployment. In fact, it is the other way around! Being more productive (efficient), means gaining market share, which creates an opportunity for more employment. The alternative, low productivity and inflated cost structure, decreases employment.
Demand: The Lost link
The link between productivity and employment rests with demand. Decline in demand shrinks employment. The best example is the housing market. A productive builder may be able to capture a greater market share, but that share is in a declining market. The overall effect is that his employees work longer hours with the same technology (they do more with less). But the industry sheds workers due to limited demand, not because of increased productivity. Wages during this time stay flat or decline due to thin margins and little growth potential.
Show Me The Data
Two data tools that assist us in this discussion are Current Employment Statistics (CES) and Labor Productivity databases from the Bureau of Labor Statistics (BLS). CES tracks hours worked, while the labor productivity database tracks hours as well as output. A quick glance at these data indicate that – sure enough – hours have increased. Output per person is up while earnings have declined and employment has shrunk. The astute observer will, however, note that hours have been dropping since 2007 and likely rebounded recently only in response to the need to rebuild critical inventory levels. I would expect hours to continue their slide in the short term.
Easy to Cut, Hard to Invent
Looking forward, cutting cost is easy: Don’t sign the check, reduce the crew, punish vendors for late shipments – the list is endless. But what is needed now in part, is new products that create demand. In the long run, this is the only way employment will increase.
All of which means businesses have plenty of hard work cut out for them.
“Green” versus “Conservation” Jobs
Green Jobs: The Issue
I likely am one of the first and few to question the reality of “Green“ jobs. The current employment buzz focuses on jobs in Green industries, even though no definition exists for these industries or jobs for that matter. There have been a number of attempts to identify the “Green” job. Below is one example from the State of MN:
“We’re moving to a green economy, a sustainable economy. Energy in the future will come from the sun, the wind, the waves and even algae. There will be a need for trades-people who understand conservation, attorneys who comprehend cap trade, energy employees who “get” smart grids and co-generation.”
No real definition there, rather a list of principals all well and good. However, note in the last part of this statement there is a small reference to conservation!
Conservation is where the Money is, thus the Jobs will follow!
Recently I reviewed the sources and uses of energy, industries which define part of the Green job discussion. It occurred to me while viewing this graphic that we in the U.S. are missing a huge opportunity to conserve- currently not necessary part of our history, popular culture or thinking. But how can conservation create jobs, and lot of them. The answer lies through gains in productively and thus market shares.
The Formula
This is an old rule in manufacturing (knowledge and skill sets we are losing in this country). If one can make a product or deliver a service at less cost, market share will follow as long as there is demand. As you note from reviewing the graphic, the immediate opportunity available in “green” industries is small. Contrary to common knowledge, is the market opportunity to reduce wasted energy. If we were able to conserve/reduce waste, the result would be increased efficiency leading to higher productivity and ultimately increased market share the final result being significant numbers of new jobs.
The BLS is starting the process of defining the green job. I wish them luck. In the mean time it will be interesting to see where the real jobs show up in our economy- I am putting my bet on where the money is.
