Flat U.S. Wages Help Fuel Rebound in Manufacturing

The celebrated revival of U.S. manufacturing employment has been accompanied by a less-lauded fact: Wages for many manufacturing workers aren't keeping up with inflation.

The wage lag is a key factor contributing to the rebounding competitiveness of U.S. industry. A recent uptick in factory employment and the return of some production to U.S. shores from abroad both added jobs that probably otherwise wouldn't exist. But sluggish wages also are squeezing workers' incomes and spending. That, in turn, hurts retailers who target middle-income earners and restrains the vigor of the economic recovery.

Overall compensation to factory workers doesn't come close to the impressive productivity gains that American factories have enjoyed over the past year. WSJ's David Wessel reports. (Photo: AP)

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"The U.S. has held manufacturing wages in check while there has been strong wage growth in China and moderate wage growth in Mexico," says economist Gordon Hanson of the University of California, San Diego, referring to two of the U.S.'s biggest lower-wage competitors.

With unemployment still high and global competition intense, employers have the upper hand in asking unions to relax work rules and restrain, or reduce, wages and benefits. Scores of U.S. companies have negotiated two-tier contracts with unions that allow them to pay new hires less than existing workers or otherwise restrain wage and benefit costs.

At American Axle & Manufacturing Holdings Inc.'s AXL -7.45%plant in Three Rivers, Mich., new hires for assembly start at $10 an hour. Those hired before 2008 get a "legacy" rate of about $18 an hour.

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More in the Series

A Crib for Baby: Made in China or Made in USA? (5/22/2012)

Once Made in China: Jobs Trickle Back to U.S. Plants (5/22/2012)

Indiana Steel Mill Revived With Lessons From Abroad (5/21/2012)

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General Electric Co. GE -1.60%announced plans to move production of electric water heaters to Louisville, Ky., from Mexico after U.S. unions agreed to a $13-an-hour starting wage for new hires, $8 to $10 or more an hour below the previous contract.

Without such concessions from workers, company executives say, they would be less likely to expand employment in the U.S. at all. After a 35% decline in the number of U.S. manufacturing jobs between 1998 and the trough in 2010, the total since has risen by 4.3% to 11.9 million in April.

Across the country, earnings for production and other nonsupervisory workers in manufacturing averaged $19.15 an hour in April, 3.2% below their recent March 2009 peak and back to where they were in 2000, adjusted for inflation, the Bureau of Labor Statistics says. In contrast, average hourly earnings for all private-sector production and nonsupervisory workers across the economy have risen 5.3% to $19.72 since 2000.

But averages can be misleading because there has been so much change in the industry, and wages measures don't count health or retirement benefits. The Employment Cost Index, a government measure that includes benefits and is adjusted for the changing mix of occupations and industries, shows that, adjusted for inflation, manufacturers' labor costs were 2.7% lower in the first quarter of 2012 than in 2005, when the economy was stronger and unemployment lower.

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For public and private civilian employers of all sorts, labor costs were basically flat—down 0.3%.

At the Vaughan-Bassett Furniture Co. plant in Galax, Va., where 635 workers make wooden bedroom furniture, workers went without any raise for two years. At the end of 2011 they got a 3% raise, on average. That isn't enough to keep up with the 7%-plus increase in consumer prices over those three years. Starting pay today for hourly workers in the nonunion plant is about $9 an hour, plus health insurance and other benefits. The most experienced typically get $14 to $15, plus benefits.

Good workers are easy to find in Galax, says Wyatt Bassett, the firm's chief executive. Five other furniture firms have closed plants there, leaving Vaughan-Bassett as the last local survivor. The firm is in the midst of an $8 million expansion that it expects will create more than 100 jobs. Modest wage growth and worker willingness to embrace more efficient production methods have allowed the company to compete with imports from Asia, Mr. Bassett says. The message from the workers, he adds, has been: "You all tell us what you need and we'll work with you."

The absence of wage growth may make manufacturers more likely to hire. But for workers, it means less income, and thus less to spend.

Harley Gannon, sole breadwinner for a family of five in Union City, Mich., got an assembly job 14 months ago at an International Automotive Components plant in Mendon, Mich., that pays $9.67 per hour, less than $21,000 per year. That is down sharply from the $15 per hour he earned repairing electronic games at a Chuck E. Cheese outlet before losing that job six years ago. "Our hourly wage structure is competitive in the industry," an IAC spokesman said.

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Mr. Gannon, 32 years old, who has a community college degree in electronics, hopes to be promoted to higher-paying maintenance work at IAC. For now, he is watching his pennies. Just filling the tank in his 1996 Ford Windstar eats up about a third of his take-home pay, he says. The family rents a three-bedroom home for $625 a month and relies on food stamps to stretch his paycheck. "My two older kids have just had birthdays, and I haven't been able to buy them presents yet," he says.

For some manufacturers, the key has been encouraging older workers to retire and hiring new ones at lower wages.

In 2010 and 2011, new hires by manufacturers of durable goods, those meant to last three years or more, were paid an average of 0.3% less than workers who were newly hired in 2007 and 2008, adjusted for inflation, according to an analysis of government data by Jesse Rothstein of the University of California, Berkeley. New hires in nondurable manufacturing were paid 1.7% less.

Despite their near-death experiences of recent years, the Big Three U.S. auto makers still pay some of the highest wages in manufacturing, but the average is declining. General Motors Co., GM -2.10%Ford Motor Co. F -1.66%and Chrysler Group LLC have a mix of veteran workers making around $29 to $33 an hour in base pay; recent hires earn $16 to $19, according to the Center for Automotive Research, an Ann Arbor, Mich., research group.

"Workers really understand the global economy," says Cindy Estrada, a 43-year-old vice president of the United Auto Workers. The rank and file know they need to be competitive on wages, she says. But some companies are pushing pay down so far—$10 or $11 an hour with monthly health care contributions of as much as $400 a month—that workers can't afford to buy the cars they build, she adds.

Of course in today's economy, many Americans are glad just to have a job. Joey Payton of Detroit says he earned $17.11 an hour at a Lear Corp. LEA -2.87%plant in Warren, Mich., assembling instrument panels for trucks, until he was laid off in late 2007. In July 2009, he got a job at Johnson Controls Inc. JCI -2.37%in Highland Park, Mich., where he assembles the same type of products—for $12.25 an hour. Mr. Payton, 31, has cut back on family trips and on buying electronic gadgets.

A spokeswoman for Johnson Controls says the company believes its "wages and benefits are competitive within the automotive industry."

The high school graduate says he is angry about having to work for less but says, "People will take anything just to get their bills paid and food on the table."

Amid complaints of "skill shortages" from U.S. manufacturers, workers with highly sought-after skills are doing better. Alle-Kiski Industries, a Leechburg, Pa., machine shop, cut wages for the operators of the computer-controlled machines that shape metal parts by about 5% in 2009 when orders slumped. Partly to keep those workers from leaving for other plants, the company since has increased pay about 20%, to an average of about $18 an hour, says Kevin Hartford, the company's president. Employment at the plant has risen to 37 from a low of 22 in 2009.

The sluggish wage growth coincides with an impressive burst of rising factory productivity. Output per hour in American manufacturing has increased by 13% in the past five years and 21% in the five years before that.

William Strauss, a Chicago Federal Reserve Bank economist, expects the pace of wage increases to quicken eventually if productivity gains persist. "Already, you hear about the dearth of certain kinds of workers," he says. "There's a recognition that as we train workers to be more productive and more skilled, you'd better compensate them so that they stay with you."

Indeed, Germany offers a relevant example. Inflation-adjusted wages there didn't rise much after the reunification of east and west in 1989 and declined in the mid-2000s. Holding the line on wage increases and altering union work rules made German factories more efficient and competitive—particularly in contrast to southern European factories—and contributed to the nation's export boom. But now German manufacturers are being pushed to increase wages.

Sometimes with conflict and strikes, sometimes without, many manufacturers have pressed unions to accept changes that reduce labor costs and improve efficiency. About 11% of U.S. manufacturing workers are represented by unions.

Spirit AeroSystems Holdings Inc., SPR -1.45%a Wichita, Kan., maker of aircraft parts, says many of its hourly workers earn roughly 5% to 10% above market levels so it is trying—gradually—to restrain base pay while giving workers upside based on quality and productivity. Over the past two years, Spirit has reached unusually long, 10-year pacts with its major unions that, the company says, will keep labor costs "stable and predictable."

Some unions are agreeing to the use of lower-paid temporary workers. Tony Wilson, president of the Machinists union local in Kansas City, Mo., estimates the temporary, or "casual," assembly workers at the Harley Davidson Inc. HOG -2.41%motorcycle plant there get about $14 an hour while union members get $22 an hour. "Obviously," he says, "the folks that are coming in as 'casuals' are victims of the economy."

A Harley spokeswoman said temporary workers who stay at the plant for more than nine weeks get raises to at least $16 an hour.