President-elect Donald Trump has claimed victory in his effort to preserve employment for Carrier workers in Indiana. Assisted by $7 million in tax incentives provided by the State of Indiana, Mr. Trump persuaded the company not to move 800 furnace manufacturing jobs to Monterrey, Mexico. This works out to a taxpayer-funded subsidy of $8750 per job.
Another 1300 Carrier jobs still will move to Mexico between now and 2019. Published reports have indicated that the company anticipated cost savings of some $65 million per year from moving all 2100 positions to Monterrey. So Carrier is taking at least a partial step toward maintaining its global competiveness, while at least partially appeasing the incoming president.
I wrote an op-ed in Forbes on August 22, 2016, in which I argued that Carrier no doubt had quite good business reasons for planning the move to Mexico. Carrier’s February 2016 announcement of the decision said that it was due to “ongoing cost and pricing pressures driven, in part, by new regulatory requirements.”
Carrier has been manufacturing products in Monterrey for some years. The company certainly has a clear understanding of why moving production of some air conditioning units makes business sense. It would not be wise for them to explain their reasoning in public because such proprietary knowledge would be of great interest to their competitors.
Some commentators have opined that the decision was driven largely by lower labor costs. Carrier’s expenses for employee salary and benefits average about $34 per hour in Indiana, while those costs in Mexico are only around $6 per hour. It’s possible the move was prompted primarily by labor cost savings, although my analysis of data compiled by The Conference Board suggests otherwise. The value generated by an hour worked in the United States has risen by 40 percent over the past 22 years of NAFTA. In Mexico, the gain has been only 10.5 percent. Productivity has grown faster in the United States, so the incentive to shift production to Mexico today ought to be weaker than it was 10 or 20 years ago. (Note: Those figures apply to the productivity of all workers. If it was possible to analyze just the manufacturing sector, perhaps the findings would change.)