On January 31, Electrolux announced (h/t Alan Freeman, ipolitics.ca) that it would be closing its new (2012) factory in Memphis, Tennessee, by the end of 2020. This facility, you may recall, was a subsidized relocation from L'Assomption, Quebec (a Montreal suburb) that had an aid intensity of at least 99%! Yes, Tennessee state and local governments gave Electrolux a free factory ($188.3 million at present value in subsidies) while allowing it to get rid of its union, cut 60 jobs, and save over $4 per hour in wages on the jobs they kept.
As if all that weren't bad enough, the state of Tennessee agreed not to put clawback provisions into the contract with Electrolux, although the state was already requiring such clauses in contracts with major companies like Volkswagen in Chattanooga. That piece of economic development malpractice has now come back to bite the governments involved where it hurts. Not only does the contract specifically prevent the state from getting its money back, state and local governments guaranteed loans connected with the project, the payments for which will last until 2036. According to the Commercial Appeal's article, state government is on the hook for $48.5 million in loans, while Memphis and Shelby County governments must pay off a further $28.0 million.
While Electrolux committed to employing 1,240 people in order to receive the subsidies, its peak employment appears to have been the 1,100 who were employed in 2017. Now, just two years later, the company employs only 530 in Memphis, a figure that has been stable for about a year, supplemented only by overtime and temporary workers, both of which have now disappeared.
The fate of the Memphis facility is to be consolidated into another Electrolux plant in Springfield, Tennessee, in a transformation that will add no jobs in Springfield because of increased automation. According to a story in the Canadian Press (paywalled behind the Nexis database), Electrolux plans to invest $250 million to centralize all its U.S. cooking production at the Springfield facility.
A final twist in the Memphis story is that in 2016 Electrolux workers formed a local union of the International Brotherhood of Electrical Workers. Union business manager Paul Shaffer says he was "assured" by the company that the closure was not related to the decision to unionize. Color me skeptical, but thanks to our old friend information asymmetry, we'll probably never know. But the timeline is: 2016, unionization; 2017, 1,100 workers; 2018, 530 workers; 2019, closure announcement. Yes, I'm still skeptical.
I've been telling people for years that we need to explicitly include corporate rent-seeking into models of site-location decisions. Both Investment Incentives: Growing Use, Uncertain Benefits, Uneven Controls (2007: download here from the first link) and Investment Incentives and the Global Competition for Capital (Palgrave, 2011) make this case strongly. How else can we interpret Electrolux's behavior, squeezing every last dollar out of desperate governments near the height of the Great Recession, and demanding no clawbacks, except as a manifestation of rent-seeking? It's time to revise site-location theory to reflect this.
And in my standard EU comparison, let me point out that an aid intensity (=subsidy/investment) of 99% is not allowable anywhere in the European Union, where the maximum aid intensity allowable is only 50%, and that only in the poorest regions of the Union, such as Bulgaria (and that only on the first €50 million of investment; with a maximum of only 25% on the next €50 million of investment, and a maximum of 17% on any investment increment over €100 million). People were saying it was a bad deal when it was announced in 2011, as pointed out in these pages and in the great series the Commercial Appeal produced at that time. We were right, far more than we wished.
Cross-posted at Angry Bear.
Showing posts with label Tennessee. Show all posts
Showing posts with label Tennessee. Show all posts
Monday, February 11, 2019
Friday, January 6, 2012
Job Flight from Canada Highlights U.S. Inequality and Low Wages
The fact that middle class living standards have been falling for decades is no secret. One way to put this in sharp relief, however, is through international comparisons. Alexander Eichler at the Huffington Post reports today that Caterpillar Inc. is demanding that its locomotive manufacturing workers in Canada take a 50% pay cut to bring them more in line with what its workers in Illinois make.
How is it that the Canadian Caterpillar workers get more than twice as much in wages and benefits as their Illinois counterparts when income per capita is lower in Canada than in the U.S.? According to the 2009 UN Human Development Report (Table M, p. 195), gross domestic product per capita in the U.S. in 2007 was $45,592 but only $40,329* in Canada. The first part of the answer is inequality. The same table shows that the U.S. has a Gini coefficient (an inequality measure in which 0 equals complete equality, and 100 when one person has all the income) of 40.8, compared with Canada's 32.6. The richest 10% of Americans make 15.9 times as much as the poorest 10%, while the figure in Canada is only 9.4 times as much.
The second part of the answer is unionization and union strength. As I noted in September, the U.S. has the fifth-lowest unionization rate of the 34 industrialized democracies in the Organization for Economic Cooperation and Development. Only 11.4% of the American workforce is organized, compared with 27.5% in Canada.
As Eichler points out, a third reason wages are often higher in Canada is that its unemployment rate is lower than the U.S. rate, 7.5% vs. 8.5%. Higher unemployment means lower bargaining power for workers.
Caterpillar is not an isolated example. As I discussed in September, Electrolux actually moved from the Montreal suburbs to Memphis, saving over $4 per hour by ditching its unionized workforce for right-to-work Tennessee, and getting a free factory in the bargain.
This comparison with Canada helps us see, from another angle, just how much pressure the middle class is under in this country. The fact that Canada is very similar to the U.S. economically suggests that it is not impossible to strengthen the union movement and hence, the middle class, here.
* Technical note: The comparison of GDP per capita is not adjusted for purchasing power parity. Companies have to pay their workers in actual U.S. dollars or Canadian dollars, so the adjustment is not appropriate for this comparison.
How is it that the Canadian Caterpillar workers get more than twice as much in wages and benefits as their Illinois counterparts when income per capita is lower in Canada than in the U.S.? According to the 2009 UN Human Development Report (Table M, p. 195), gross domestic product per capita in the U.S. in 2007 was $45,592 but only $40,329* in Canada. The first part of the answer is inequality. The same table shows that the U.S. has a Gini coefficient (an inequality measure in which 0 equals complete equality, and 100 when one person has all the income) of 40.8, compared with Canada's 32.6. The richest 10% of Americans make 15.9 times as much as the poorest 10%, while the figure in Canada is only 9.4 times as much.
The second part of the answer is unionization and union strength. As I noted in September, the U.S. has the fifth-lowest unionization rate of the 34 industrialized democracies in the Organization for Economic Cooperation and Development. Only 11.4% of the American workforce is organized, compared with 27.5% in Canada.
As Eichler points out, a third reason wages are often higher in Canada is that its unemployment rate is lower than the U.S. rate, 7.5% vs. 8.5%. Higher unemployment means lower bargaining power for workers.
Caterpillar is not an isolated example. As I discussed in September, Electrolux actually moved from the Montreal suburbs to Memphis, saving over $4 per hour by ditching its unionized workforce for right-to-work Tennessee, and getting a free factory in the bargain.
This comparison with Canada helps us see, from another angle, just how much pressure the middle class is under in this country. The fact that Canada is very similar to the U.S. economically suggests that it is not impossible to strengthen the union movement and hence, the middle class, here.
* Technical note: The comparison of GDP per capita is not adjusted for purchasing power parity. Companies have to pay their workers in actual U.S. dollars or Canadian dollars, so the adjustment is not appropriate for this comparison.
Thursday, September 22, 2011
Poll Results on Electrolux in Memphis
Thanks to everyone who took part in the poll: How likely is it that Electrolux will be in Memphis in 15 years? Here are the results.
0-25%: 11 votes, 65%
26-50%: 5 votes, 29%
51-75%: 1 vote, 6%
76-100%: 0 votes, 0%
Personally, I don't think the likelihood of Electrolux sticking around is very high. Obviously, Memphis is a great distribution hub -- think FedEx -- but this is first and foremost a manufacturing operation. Electrolux has shown it disavows any responsibility to stand by its workers, even in Sweden, even in the CEO's home town. Therefore, my vote would have been 0-25%, and I think the chances are pretty close to 0.
0-25%: 11 votes, 65%
26-50%: 5 votes, 29%
51-75%: 1 vote, 6%
76-100%: 0 votes, 0%
Personally, I don't think the likelihood of Electrolux sticking around is very high. Obviously, Memphis is a great distribution hub -- think FedEx -- but this is first and foremost a manufacturing operation. Electrolux has shown it disavows any responsibility to stand by its workers, even in Sweden, even in the CEO's home town. Therefore, my vote would have been 0-25%, and I think the chances are pretty close to 0.
Sunday, September 18, 2011
Wooing of Electrolux by Memphis Highlights Flaws of Economic Development Subsidies
The Commercial Appeal in Memphis has just published a great series on the subsidized relocation of Electrolux from a suburb of Montreal to Memphis. Electrolux is closing a 1,300-worker facility in L'Assomption, Quebec, and has pledged to create 1,240 jobs in Memphis, receiving a subsidy package worth at least $188.3 million for the $190 million plant there. Electrolux is getting almost $200 million to destroy 60 jobs in North America. Even if we only think about Memphis, we are looking at an "aid intensity" of 99% of the investment or $152,000 per job.
This is a bad deal on its face, even if Electrolux were not cutting 1,300 unionized jobs elsewhere. One way to see this is to understand that $152,000 per job is within the range that automobile assembly plants typically receive in incentives. It is unlikely that this oven plant has nearly the possibility of spurring co-location from suppliers that an auto plant does. Moreover, auto plants pay more, and they do not receive subsidies equal to 99% of the investment, but more like 33%. Plants is Mississippi, Alabama, Texas, and Georgia all fell in this range since 1999; only Tennessee paid more (46% of the investment, about $225,000 per job), for Volkswagen in Chattanooga. These numbers were calculated along with data I presented in my book, Investment Incentives and the Global Competition for Capital.
It gets worse. As the paper relates, this subsidy package was negotiated in secret, and the full amount of the incentives were not disclosed to the public; even now, the newspaper has been unable to obtain all the details that likely will add to the cost.
In addition, the state agreed to a clause in the deal that prevents it from getting its money back if Electrolux fails to deliver on the 1,240 jobs or closes. More and more states are using such "clawback" provisions in incentive deals; even Tennessee has such a clause in its contract with Volkswagen. However, since that 2008 agreement, the state has not included clawbacks in deals with Hemlock Semiconductor and Wacker Chemie, according to the newspaper.
According to another story in the series, the workers in Quebec, who were represented by the International Association of Machinists union, earned the equivalent of $18.92 per hour, whereas the workers in Memphis will earn $14.65 per hour. So Electrolux was able to get rid of 60 workers, cut the wages of the jobs they kept by more than $4 per hour, get a more central distribution location, and a free factory courtesy of state and local governments in Tennessee. At a minimum.
To top it off, we have the requisite commissioned studies showing how well Memphis and Tennessee will do if the plant employs 1,240 people for 15 years. One of the reports did not even analyze the costs at all.
Let's review all the things wrong with this deal: Negotiated in secrecy, check. Bad cost-benefit analysis, check. Overpaid relative to what other states have paid for better projects, check. No money-back guarantee, check. Job piracy, check.
One booster of the deal complained that no one was writing about how great this deal could be if there were six or 17 suppliers in five years. But a worker losing his job in Quebec asked what Electrolux would do if Mexican officials offered a big incentive package along with a wage rate that is currently about $2.18 per hour.
What do you think? See the poll to the side.
This is a bad deal on its face, even if Electrolux were not cutting 1,300 unionized jobs elsewhere. One way to see this is to understand that $152,000 per job is within the range that automobile assembly plants typically receive in incentives. It is unlikely that this oven plant has nearly the possibility of spurring co-location from suppliers that an auto plant does. Moreover, auto plants pay more, and they do not receive subsidies equal to 99% of the investment, but more like 33%. Plants is Mississippi, Alabama, Texas, and Georgia all fell in this range since 1999; only Tennessee paid more (46% of the investment, about $225,000 per job), for Volkswagen in Chattanooga. These numbers were calculated along with data I presented in my book, Investment Incentives and the Global Competition for Capital.
It gets worse. As the paper relates, this subsidy package was negotiated in secret, and the full amount of the incentives were not disclosed to the public; even now, the newspaper has been unable to obtain all the details that likely will add to the cost.
In addition, the state agreed to a clause in the deal that prevents it from getting its money back if Electrolux fails to deliver on the 1,240 jobs or closes. More and more states are using such "clawback" provisions in incentive deals; even Tennessee has such a clause in its contract with Volkswagen. However, since that 2008 agreement, the state has not included clawbacks in deals with Hemlock Semiconductor and Wacker Chemie, according to the newspaper.
According to another story in the series, the workers in Quebec, who were represented by the International Association of Machinists union, earned the equivalent of $18.92 per hour, whereas the workers in Memphis will earn $14.65 per hour. So Electrolux was able to get rid of 60 workers, cut the wages of the jobs they kept by more than $4 per hour, get a more central distribution location, and a free factory courtesy of state and local governments in Tennessee. At a minimum.
To top it off, we have the requisite commissioned studies showing how well Memphis and Tennessee will do if the plant employs 1,240 people for 15 years. One of the reports did not even analyze the costs at all.
Let's review all the things wrong with this deal: Negotiated in secrecy, check. Bad cost-benefit analysis, check. Overpaid relative to what other states have paid for better projects, check. No money-back guarantee, check. Job piracy, check.
One booster of the deal complained that no one was writing about how great this deal could be if there were six or 17 suppliers in five years. But a worker losing his job in Quebec asked what Electrolux would do if Mexican officials offered a big incentive package along with a wage rate that is currently about $2.18 per hour.
What do you think? See the poll to the side.
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