by Semoon Chang, Ph.D., Director, Center for Business and Economic Research – University of South Alabama
November 2011
(Executive Summary)
This report explores the importance of the manufacturing industry in the Alabama economy and the importance of the low-priced electricity in attracting and sustaining the Alabama’s manufacturing industry. Major findings of this report are summarized in this section.
Importance of the Manufacturing Industry in the Alabama Economy
1. The manufacturing industry is important for the sustaining growth of an economy for the following reasons: (a) long-term commitment; (b) once lost, hard to bring it back; (c) higher wages in general; (d) major source of exports; and (e) major source of productivity growth.
2. An economy is divided into two sectors: basic sector and non-basic. The basic sector exports products to non-local buyers and thus brings money to the local economy. The non-basic sector sells their products to local consumers. The basic sector is the engine of economic growth. The manufacturing industry belongs to the basic sector.
3. Most exports from Alabama to the world economy are manufactured products. The manufacturing industry is a basic sector. Total amount of exports from Alabama in 2010 was $15,501,508,839. Manufacturing accounted for $13,139,835,777, or 84.8 percent of total exports.
4. The Alabama economy depends on the manufacturing sector more than the U.S. economy. The share of the manufacturing output relative to total output in 2010 was 11.8 percent for the U.S. and 16.3 percent for the Alabama economy.
5. Almost one out of every four private sector workers in Alabama works in the goods-producing sector. In Alabama, manufacturing employment was 15.9 percent (237,900) of total private sector employment, while goods-producing employment which includes employment in natural resources and construction was 22.5 percent of total private sector employment in July 2010.
6. Average manufacturing wages are higher than other industries. The 4th quarter 2010 data from the Labor Market Information by the Alabama Department of Industrial Relations indicate that the average weekly wage in the manufacturing industry ($1,002) is higher than the average weekly wage in all industries ($839) which include the manufacturing industry.
7. The manufacturing industry has a major impact on state tax revenue and charitable contributions in Alabama. Contributions toward state tax revenues and also charities are expected to vary in proportion to wage differences.
Manufacturing Industry Creates More Wealth for Alabama than Other Industries
8. RIMS II multipliers for Alabama indicate that the average earnings multiplier for all industries combined in Alabama is 1.5828, while the average employment multiplier for all industries combined in Alabama is 1.6573.
9. Both the earnings and employment multipliers are significantly larger for the manufacturing industry than for the non-manufacturing industry in Alabama. The earnings multiplier is 1.9078 for the manufacturing industry and 1.4122 for the non-manufacturing industry, while the employment multiplier is 2.0739 for the manufacturing industry and 1.4386 for the non-manufacturing industry.
10. The impact of these higher manufacturing industry multipliers is very significant. For example, every 100 manufacturing jobs in the state of Alabama create an additional 107 jobs in the state. Additionally, those 100 manufacturing jobs will create nearly $410 million per year of additional gross earnings. These additional earnings will support increased spending throughout the state and local economies.
11. The above multipliers may be understated. The very nature of manufacturing process requires the availability of resources and intermediate goods to produce the final products. Usually, these resources are located in relatively close proximity to the manufacturer. For example, ThyssenKrupp in South Alabama, for instance, was reported to already have attracted five supplier firms to the area and a corresponding increase in employment and gross earnings.
Price of Electricity and the Manufacturing Industry
12. Many manufacturers are energy intensive, and spend between 5 and 17.9 cents per dollar of product output for electricity. For chlorine and air separation manufacturers, electricity can account for as much as 60 to 75% of direct operating costs.
Price Elasticity of Demand for Electricity in the Manufacturing Industry
13. The price elasticity measures percentage change in quantity demanded in response to one percent change in price.
14. Review of published nation-wide studies indicates that a one percent increase in the price of electricity leads to 0.13 percent decrease in the quantity of electricity demanded in the short run, and to 1.22 percent decrease in the quantity of electricity demanded in the long run. The decrease in demand for electricity with higher prices results in substitution for other energy sources and, a likely decrease in production activities that may vary with products.
Status of Manufacturing in Alabama
15. The share of the manufacturing employment relative to total non-farm employment in the U.S. economy had decreased from 12.47 percent in 2001 to 8.88 percent in 2010. The comparable share in Alabama had also decreased from 17.05 percent in 2001 to 12.63 percent in 2010.
16. Given the energy intensive nature of manufacturing and the significant direct impact on profits of electricity cost, one of the key reasons that manufacturing has located in Alabama has been the access to competitively priced electricity supply.
17. It is clear that the manufacturing industry provides significant benefits to the Alabama economy both directly and indirectly through multiplier effects. In order to maintain and expand those benefits, Alabama policies and regulations need to focus on providing competitively priced electricity supply to support the manufacturing industry.
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[The full report is available from AIEC. See Contacts]
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