Ask Michigan manufacturers about what labor issues they’re facing, and they’ll likely tell you they’re having to pay workers more these days.
That’s a trend that’s been borne out in countless studies and executive surveys about the state of the economy and the outlook for the workforce.
The only problem: The labor market information from the state of Michigan paints a much different picture on wages.
According to the most recent state jobs data, wages for manufacturing production workers in May sunk to their lowest levels in the last 12 years as the average hours worked dipped to the lowest point since 2009. Meanwhile, the number of people working in manufacturing hit its highest level in almost a decade.
For one economist, this confluence of trends tells the story of a weakening manufacturing sector.
“Certainly, I think this is a canary in the coal mine,” said Paul Isely, the associate dean for undergraduate programs at Grand Valley State University’s Seidman College of Business. “We’re seeing the employment increases plateau out, we’re seeing weekly wage earnings starting to trend lower — just as inflation is starting to pick up a little bit on other fronts. This really will start to put pressure on all parts of the Michigan economy.”
The decline in wages and hours started to appear last summer when the Purchasing Managers Index for new orders “dropped quite a bit here in Michigan and it’s never fully recovered,” he said.
In the latest Current Business Trends report, GVSU Economist Brian Long noted the index for new orders remained flat in April, which correlated to a slight easing in purchasing managers’ short-term outlooks. Respondents to Long’s survey also noted that wages were trending higher, a common refrain from most manufacturers in recent months.
However, the state wage data showed just the opposite. In May, manufacturing workers had average weekly earnings of $839.12, down $91.07 compared to a year ago and $2.89 below from the previous nadir in 2009 at the depths of the recession, according to statistics from the Michigan Department of Technology, Management and Budget.
AT ODDS WITH SENTIMENT
The dip in wages stands in stark contrast to manufacturing executives’ statements in recent months that the competition for a limited pool of workers has forced them to pay their employees more.
It’s a dichotomy that’s perplexing economists and economic developers alike, who’ve heard manufacturers talk at length about rising wages.
“The vast majority of the employers we work with are increasing wages due to the tightening talent pool,” Lakeshore Advantage CEO Jennifer Owens said in an email to MiBiz, echoing the sentiments from her counterparts from across West Michigan.
That employers’ statements do not match up to the data has left economists scratching their heads.
“We are a little bit flummoxed,” said Jim Robey, director of regional economic planning services at the W.E. Upjohn Institute for Employment Research in Kalamazoo, which tracks indicators and hiring around West Michigan.
“We were surprised to look at this,” he said. “We are hearing the exact same thing (about rising wages).”
Robey wonders whether manufacturing firms are actually in a position to increase wages, given that so many of them “are price takers” and have leaned out their operations throughout the recovery from the recession.
“It’s a little disconcerting and a little surprising,” Robey said of the decline in manufacturing wages.
Across all industries in Michigan, income growth is expected to slow this year compared to 2015, according to a May report from the University of Michigan’s Research Seminar in Quantitative Economics.
U-M economists forecast real disposable income to retreat in 2016 to a growth rate of 2.6 percent, compared to blistering 5.1 percent last year, based on “modest inflation and the slowing of nominal income growth.” The forecasted growth rate slows to 1.6 percent next year.
SYMPTOM OF RETIRING BOOMERS
At least anecdotally, Isely and other economists attribute the wage trend in part to baby boomers finally deciding to retire from the workforce after a long delay and to companies replacing them with people who have less experience.
“That in and of itself isn’t a bad issue,” Isely said of the influx of less experienced workers, warning that productivity could also ease in the short term as a result. “As we lose more experienced workers and fill them in with less experienced workers, it will affect our output.”
Another factor: With manufacturing employment up, companies could be cutting back on overtime, which would reduce weekly earnings, sources said.
Robey also speculated that worker churn — another common challenge cited by manufacturing executives — could be weighing down wages.
“Naturally, you bring folks in and they start to earn a little bit more and then they go somewhere else and you probably bring in lower paid workers then,” he said, adding that effect was “purely musings and guesses” on his part.
Still, Robey remains confident about the Michigan manufacturing sector.
“I think it’s just softer than maybe what the initial thoughts were,” he said. “I think we continue to have a strong labor market and a strong economy, and I’m just hoping that it persists.”
Isely also continues to watch the average time worked per week by manufacturing workers, which declined to 42.4 hours last month, the lowest point since 2009. That represented a decline of 2.2 hours from May of last year.
While it’s normal for hours to drop after a recession once companies start to hire again, “this is a long way out for that particular effect to be happening,” Isely said.
“It could be that they could not find the workers,” he said, or perhaps employers have to train workers more in the short term, causing them to not work as many hours. “If that trend continues for a few months, it’ll grow more worrisome.”
POLITICS AT PLAY
Isely thinks international issues will have little play on Michigan and the national economy this year, as most companies’ plans have already “baked in” any worries of a slowdown.
“The election cycle is probably our biggest worry right now,” he said. “I think it’s created a lot of uncertainty for business and I think people are keeping their powder dry to wait and see where they will need to spend it after the fact.”
When asked which of the presumed presidential nominees would be best for the economy, the economist demurred at picking sides, but offered that the “most radical” candidates in either party would pull the U.S. economy out of its current “sweet spot” of government spending per gross domestic product.
“One thing we know in looking at economies across time is that a blended economy works best, one that has some government and some corporate strength,” Isely said. “Right now, the United States has stayed in the sweet spot where the amount of government hasn’t grown large enough to slow down growth and the strength of corporations hasn’t grown so strong that they’re stomping out the innovators and slowing down growth. You need that sweet spot in the middle.
“Generally speaking, a mainstream Republican or a mainstream Democrat will stay in that range. Right now, the electorate is really pulling them outside of that range and that could really hurt growth in the United States if we chose to walk down a path with either too much government or not enough government.”