Chapter 5: returning to labor, capital, land & technical skills

1. Chapter 5: returning to labor, capital, land & technical skills • How important are these factors in the cost of production? • What are key variations spatially • How does scale affect our view of these issues? • Going beyond the text: the issues raised in this chapter are fundamental to consideration of economic activity for the rest of the quarter

2. Labor How important is labor as a location factor for manufacturers? Lloyd & Dicken – my old textbook: Production workers 25% of value added, All labor 46% of value added What is value added? Value added = value of shipments - cost of goods sold

3. An Example of Value Added: Margi Beyers Pizza/Bread Stone Wholesale: $16. Less: Cost of clay $ 4 Cost of glaze $ 1 Cost of energy $ 2.50 Other overhead (labels) .50 Transport Cost (Raw Material + Delivery .50 Capital Charges (kiln, equipment) 1.00 Subtotal $9.50 Value Added $16 - $9.50$6.50

4. Wages per dollar of value added Average = .26

5. Wages per dollar of shipment Average = 12%

6. Production workers as a proportion of total Employment Average = 71%

7. Labor Costs among regions Production work pay/hour $6.68 to $12.34 in 1983 In 1997 - Low $9.96 South Dakota - Mean $13.17 - High $17.17 Michigan Classic view of wage rate equilibrium: D $ S S WA D S WB D D S QA QB

8. * * * * * * * * * Right to work states * * * * * * * * * * * * * U.S. Average = 13.9% of Wage & Salary Workers

9. Evidence on Regional Wage Rate Convergence Historic movement of blacks from the South to the Industrial North Mexican migration into the U.S. today Internal movement in the U.S.: job pull for $? Producers ability to move capacity to cheap labor - U.S. shoes, textiles Social, Environmental

10. Weber’s Analysis of Low Cost Labor Critical Isodapane - Tr. Cost = Labor Cost Differential 4 W M3 M1 5 2.5 1 L C M2 At W labor costs are $5 per unit output below L Isodapanes - contours of transport cost increase away from L

12. Unionization Rates & Labor Cost Differences A falling percentage over time: 1983 20.1% 1991 16.1% 1999 13.9% 2007 12.1% Wage Rates above Non-Union 2006 $23.33 per hour - union 2006 $18.53/week - nonunion

13. Labor Costs Versus Labor Productivity/Skill as a Factor in Regional Development Washington State Investment In Human Capital Study % of companies dissatisfied with employee skills: (1) Basic- ca. 35%; communication ca. 40%, problem- solving 48%, work habits - 42% (2) Educational - difficulty in finding employees: basic skills below high school: 38%, high school 56%, job related specialized skills 86%, liberal arts degree 59%, advanced degree 67%. (3) Key needs - in Training Programs, and in types of training provided.

14. Local Examples of Labor Force Programs Washington State Workforce Board Puget Sound Regional Council Prosperity Partnership WorkSource Oregon Idaho Workforce Development Training Program

15. Geographer’s New Views of Labor and Regional Advantage Storper’s vision of “untraded interdependencies” as regional assets Economic Sociology: - Institutionalism; embeddedness; structure and social reproduction; networks; other key factors?

16. Thomas Friedman – NYT Reporter • Advocate of globalization, but also the need for labor force development here in the U.S. in the face of this trend • His recent book was on the NYT best-seller list • He editorialize for support for an ex-M.I.T. president-headed report called “Rising Above the Gathering Storm.” Link: www.nationalacademies.org

17. Friedman’s Ten Flatteners: • Outsourcing • Offshoring • Open- Sourcing • Insourcing • Supply Chaining • In-forming (search engines) • The Internet • Fall of the Berlin Wall • Netscape’s Public Offering • Work Flow Software • The Steroids (Digital, • Mobile, Personal and • Virtual) • He argues together they have • allowed unparalleled • collaboration

18. Friedman Concludes about the U.S.: • Clearly, offshoring business services is intimately tied to • other ongoing forms of restructuring • It provides challenges and opportunities for advanced • economies as well as developing countries • There are significant research opportunities • There are also many policy challenges

19. Capital Sources: Startup versus Later in Firm Life Startup: Personal Sources, “mattress money,” “Business Angels,” Venture capital, IPO’s, and business loans After Startup: Internal retention of profit, (further) stock offerings reliance on formal capital markets Selling out, being acquired to obtain capital for expansion

20. The Circular Model of Capital Flow • Interest rates • Tax policy & public • investment Stock of Productive Capacity Industrial Output Final Consumer Demand Investment “Savings” Business Income (Value Added) Payments to Households “Savings” - retained earnings, household savings, institutional investors, international capital sources

21. U.S. Capital Investment Trend

22. 2006 Capital Stock Per Employee Mean: $149,776

23. Manufacturing Capital and Wages Per Worker 2006

24. Net Stock Private Fixed Assets Per Employee - 2007

25. Evidence of long-term reductions in capital tied up in inventories due to better logistics in the product delivery system

26. Manufacturers’ Ratio of Inventories to Shipments Impact of the Great Recession

27. Regional Differences in the Availability of Capital DB Interest Rate SB SA DA QB QA Capital Flows respond to interregional/international variations in interest rates, but: 1. Lender conservatism 2. Institutional impediments 3. Structural differences

28. Capital Mobility Immobility of physical capital High level (potentially) of mobility for monetary capital, but: (A) institutional impediments - nations, trading blocs, currencies (B) industrial differences - firm size, age, business concept (C) public policies - incentives such as tax write-offs, lower interest rates (D) new forms of integration (IT networks), new types of securitization (e.g. REIT’s) & use of Modern Portfolio Theory

29. Spatial Variations in the Cost of Capital Historic fragmentation of capital markets Much more integration now, but still: A: “herding and fleeing” in commercial real estate markets B: internationalization of markets yet institutional/cultural variations in practices C: changes in investor culture: IPO’s & .com phenomena

30. Managerial and Technical Skills:Corporate Headquarters • The concentration of these in a few very large cities • Synergistic interactions at the top of the corporate hierarchy • Decentralization of these headquarters • Structural relationship between headquarters location and location of R&D facilities – historic geographic co-location

31. Borchert’s Changes in Industrial Headquarters

32. Patents As Indicators of Technical Knowledge Effort

33. Change in State Level Distribution of Patents

34. Distribution in cities has gotten more unequal in recent years, largely due to big changes in the West. The big gainers have been Driven by Boise, Rochester NY, Austin- San Marcos, Burlington, Ft. Collins-Loveland, And Rochester MN

35. Technical Knowledge Fundamental to any type of production system Constantly changing - Schumpeter’s view of the “process of creative destruction” - invention: autonomous vs. induced innovation: widespread adoption of inventions product versus process change The R&D Process in manufacturing patents as indicators of success at invention

36. 2008 U.S. R&D Sources of Funds Source: Statistical Abstract of the United States 2012

37. Historic Sources of R&D – U.S.

38. R&D Objective Use of Funds 2008 Source: Statistical Abstract of the United States 2012

39. Use of R&D Funds – U.S.

40. Composition of R&D Effort 2008 Source: Statistical Abstract of the United States 2012

41. Performance Sector, R& D United States 1999 N.P 2.6% 7% University 13.9% 8.1% 67.1% Source: Statistical Abstract of the United States, 2000

42. Performance Sector R&D U.S. 2008 Source: Statistical Abstract of the United States 2012

43. Other Industries - $40.9 billion Source: Statistical Abstract of the United States, 1998

44. R&D as a % of Sales - 2008

45. Technical Knowledge Spatial Concentration of R&D activity Mobility and Availability of Technical Knowledge in Space Regional Consequences of R&D Effort Research at the UW - Impacts on local industrial development

46. Data not Disclosed Alabama in this group

47. Not Disclosed AL in this group

48. 1.19 2.84

49. D 0.27

50. 1.34 1.10