Over at Economy Lab, Stephen Gordon writes:
The fundamental problem facing manufacturing firms is that the [industrial] prices have been growing more slowly than consumer prices. CPI inflation has averaged 1.85 per cent a year since 2002, but the Industrial Price Index for all manufactures has only increased at a rate of 1 per cent.
His argument is that Canadian manufacturers have been squeezed because they must sell their output at industrial prices, but are expected to pay their workers according to consumer prices (CPI). This argument implicitly assumes that labour is the only input, or at least the largest one. In fact, wages are a fairly small fraction of total costs in most Canadian manufacturing.
Some more relevant figures were sitting right under Stephen’s nose. The Industrial Price Index shows that the price of basic materials (“First-stage intermediate goods”) increased far more than CPI since 2002. Meanwhile, the price of “Finished goods” (except food) actually fell slightly.
Manufacturers have indeed been squeezed by rising input costs, but the big increase was in basic materials rather than wages. In other words, manufacturing has been hit by soaring commodity prices, the “popular explanation” that Stephen set out to downplay.
Of course, the other half of this story is weak output prices. But simply pointing to a relative price change is not much of an analysis. Surely the real issue is why the price of manufactured goods has stagnated or declined.
Has global demand shifted away from manufactured goods? Has increased supply from China undermined prices, possibly through violations of labour and environmental standards? If so, should we do anything to remove or offset this unfair competitive advantage?
Stephen does not engage these questions. He simply asserts that “there’s nothing intrinsically important important [sic] about the manufacturing sector.”