Regulation Riddle

I’ll continue my look at favorite myths of both the left and right. This week it’s the right’s turn.

A familiar myth of conservatives is that over-regulation led to the decline of manufacturing in the U.S. Is this true? While labor and environmental regulations in a well developed country like the U.S. may play some part in the total cost of a manufactured good, they are not the only costs. Below is a chart from the Bureau of Labor Statistics showing a comparison of labor costs in the U.S., China, Mexico and a few other areas.(Click to see larger image in separate tab)

As we can see, Chinese manufacturing companies have a huge advantage in this area. There are few labor regulations and those regulations which are in place are loosely enforced. The U.S. would have to abolish almost all of its labor regulations regarding minimum wage, overtime, Social Security, Unemployment insurance and Workmen’s Compensation and they still would not be competitive with China. Chinese manufacturing plants enjoy a host of other competitive advantages, according to Manufacturing News: many do not have to pay for the land their factories are built on; many companies do not pay income taxes, property taxes or value-added taxes. In rural areas, manufacturing plants pay only enough to compete with the small, if any, compensation that an overworked person can make in subsistence farming. Parts of Mexico enjoy the same advantages. If minimum wage laws were abolished in the U.S., would you take an assembly job for $2.60? If so, then we could stay competitive with Mexico and China.

How much manufacturing have we lost over the past two decades?  According to the Small Business Administration (SBA), there were almost 28 million private businesses in the U.S. in 2007. 22 million were what are called non-employer firms, i.e. businesses that report no employees.  These would include people who work for themselves as sole proprietors or Subchapter S corporations. In 1988, 6.5% of private employer businesses were classified as manufacturing and they accounted for  22% of private employment.  In 2007, only 4.7% of businesses were classified as manufacturing, accounting for 11% of private employment.  If we had the same percentage of employment in manufacturing that we did in 1988, we would have approximately 13 million more people employed.  The Bureau of Labor Statistics (BLS) reports  that the number of unemployed was 14.8 million in September.

There is no magic formula that will enable us to compete in manufacturing and assembly industries which can produce with low cost, marginally educated labor.  The edge we have and must maximize over newly industrializing nations must be a more educated workforce, one which can command the higher precision and more complicated manufacturing industries.  Improving educational standards is a multi-decade commitment of dollars and community.

So why do conservatives consistently trumpet regulations as the chief cause of the decline of manufacturing jobs in this country? Because it gives them a justification for policies to reduce the existing labor and environmental regulations. Conservatives know that, if they advocated abolishment of many or all of these regulations in order to be competitive, most of the voters would turn away from them in disgust. So they promise that some reasonable reduction in regulations will make a big difference, hoping that the voters will buy the argument on its plausibility without checking the facts.

2 thoughts on “Regulation Riddle

  1. Steve Stofka says:

    Some conservatives genuinely believe that a reduction in such regulations will solve our decade long deteriorating employment situation. I am not arguing that there should not be some reduction in some regulations, only that it is a conservative fable that such reductions will provide a magic solution.


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