Economists: Despite high wages, state’s manufacturing costs are low

Despite Connecticut’s reputation as an expensive place to do business, the state actually boasts some of the lowest manufacturing costs in the nation, University of Connecticut economists assert in their latest quarterly review.

Connecticut ranks 43^rd lowest among 50 states, and well below the national average, in terms of the total cost required to produce each $1 of manufactured goods, The Connecticut Economy reported in its fall review, released late last week.

Despite high average wages and energy costs, Connecticut manufacturers have effectively employed production efficiencies and tapped into cheaper materials and other production needs to keep costs down, wrote economists Subhash Ray, Lei Chen and Dennis Heffley.

“Manufacturing jobs and the sector’s competitiveness receive special attention from politicians, journalists and the public, especially in Connecticut and other states with a rich history in manufacturing,” they wrote. “This attention may be misplaced.”

The economists noted that last March, United Technologies’ chief financial officer, Gregory Hayes, made headlines when he told Wall Street analysts that “any place outside of Connecticut is low-cost.”

It’s true that in the U.S. Census Bureau’s 2007 Economic Census, Connecticut ranks fourth in average hourly wage for manufacturing production workers at $21.28. And it fares little better in salaries for administrators and other non-production workers in the manufacturing field, finishing sixth.

“There’s no denying the popular perception, based on such reports, that Connecticut is an unattractive business location,” the economists wrote. “But are these oft-cited rankings supported by sound analyses of available economic data? And if they are correct, why don’t even more firms flee Connecticut for lower-wage states?”

That’s because politicians, lobbyists, journalists and others often confuse “input prices” such as wages, rents and energy bills with overall production costs, according to the review. “Wages, for example, certainly influence costs, but they are not the whole story,” it states.

UConn also reported that many studies, such as the 2007 Milken Institute report that ranked Connecticut as the fifth most expensive states for business, tend to rely on what amounts to heavily rounded numbers assigned to wages, electricity, industrial rents and office rents and tax burdens. But these costs are not close to uniform for all states.

Firms facing higher wages have a strong incentive to use labor more efficiently, the UConn economists wrote, adding that “high input prices foster the creative use of existing technologies and the development of new, more efficient ones.

Connecticut manufacturers also have a strong track record at finding economies when it comes to purchasing raw materials.

So despite relatively high labor costs, Connecticut manufacturers spend, on average 79.3 cents to produce each $1 of manufactured goods. That ranks 43^rd lowest on a scale topped by Vermont at 95.9 cents and closed by Oregon at 70.6 cents. The national average is 83.3 cents.

Connecticut also stacks up well against neighboring states, according to the review. New York manufacturers ranked better with an average cost of 78.1 cents, but Massachusetts, New Jersey and Rhode Island finished higher at 83, 84.1 and 93 cents, respectively.

Still, Connecticut Business and Industry Association chief economist Peter Gioia said the ability of  state manufacturers to adapt to high wage costs doesn’t change the fact that they are a deterrent to business growth.

“Many reports have said Connecticut manufacturing workers are incredibly productive,” Gioia said, adding that businesses here also have controlled the cost of finished products by finding and purchasing low-cost Chinese-made components.

But there are other types of manufacturing, such as textile production and certain types of metal work that rely on high energy usage, that can’t flourish in Connecticut because hefty labor and energy costs are too great to overcome by mitigating other costs.

“There’s still a lot of manufacturing we could be doing but we don’t,” Gioia added.

State Sen. Gary LeBeau, co-chairman of the General Assembly’s Commerce Committee, said Monday that while state government has to keep working with manufacturers, it also has to recognize that the role this sector plays in the overall economy has changed.

Connecticut has lost manufacturing jobs, but “the decline is so pervasive across nearly all states,” the UConn review states. It noted that the proportion of manufacturing jobs in total employment for both Connecticut and the nation peaked during World War II and has fallen steadily since then. The national share has dropped from 37.9 percent in 1943 to 9.1 percent in 2009, while Connecticut’s slipped from 56.5 percent to 10.6 percent over that period.

‘These are powerful trends,” the UConn economists wrote. “Growth sectors in Connecticut and the U.S. have been in areas that require high-skill services such as health care, financial services, software development and education and it is unlikely this secular pattern will suddenly reverse.”

Manufacturing “is not a lost cause,” LeBeau said. “But we have got to create new business opportunities and invest in jobs, and that means focusing on other areas too.”

A strong proponent of state efforts in recent years to expand property tax exemptions to new manufacturing machinery, the East Hartford Democrat said Connecticut should consider offering similar assistance to key, non-manufacturing fields such as cutting-edge technologies and biomedical research.

“We’re going to have to make some really difficult decisions next year,” LeBeau said, adding that the next legislature and governor must try to close the $3.37 billion deficit projected for the next fiscal year. “We have to recognize that this is not just about the next year, but about the next five years and beyond, when we’re talking about investing in our economy.”