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A better stimulus idea: Training new factory workers

May 18, 2011, 7:13 PM UTC

By Vishesh Kumar, contributor

FORTUNE — Much of China’s spectacular ascent over the past decade came thanks to its role as the low-cost manufacturer to the world. In an ironic twist, the very success of that strategy is now setting the stage for a further rebound in U.S. manufacturing.

As China’s wages soar ahead of its productivity growth, the U.S. is set to again become one of the most competitive regions for manufacturing, according to new research from the Boston Consulting Group (BCG). And as the U.S. struggles with ways to create jobs, it may prove far more fruitful to focus on tapping into this trend than continuing to bank almost solely on monetary policy.

Already, the rebound in U.S. manufacturing amid an otherwise lackluster recovery has been impressive. Factory production expanded at a sharp 9.1% annualized rate in the first quarter, according to the Federal Reserve, and employers are complaining about a shortage of skilled workers. March manufacturing job openings, meanwhile, climbed to 228,000 compared to 162,000 for the same period a year ago, according to the most recent Job Openings and Labor Turnover Survey (JOLTS) by the Bureau of Labor Statistics.

Retiring baby boomers, meanwhile, will only raise the stakes. Manufacturers expect older workers to leave the workforce en masse over the coming years, but many younger workers lack the skills for the positions thanks in part to the sector’s premature obituary.

The spike in Chinese wages is bringing jobs back home. In 2000, hourly Chinese manufacturing wages were just 52 cents compared to $16.61 in the U.S. BCG forecasts Chinese rates will keep growing 17% annually and reach $4.41 by 2015, compared to $26.06 in the U.S.

U.S. productivity, though, is likely to stay well ahead of China thanks in part to better equipment and more skilled labor. BCG forecasts the Chinese productivity gap to narrow to 38% of U.S. productivity by 2015 compared with 13% in 2000.

Of course, investment in capital could further boost Chinese productivity. But that would add costs to the overall mix and counter the draw of cheap labor that brought multinationals there in the first place. And while other low-wage countries like Vietnam or the Philippines will likely continue to nibble away, none can rival the scale of China.

Cost savings are evaporating

In 2000, multinationals cut their labor costs by 77% using factories in China instead of the U.S. But by 2015, labor cost savings are expected to drop to 56%. In regions in the U.S. and China where factories are likely to be built, the labor savings in China could fall to as little as 30%. As a result, overall cost savings will fall to just 10% or less by 2015 compared to 20% or more in 2000 even before transportation and duties are taken into account. Factor in barriers to business due to time zones, language and culture, and manufacturers have even more reason to relocate to the U.S. for goods ultimately sold here.

A yuan that is likely to resume rising will further shift the balance in America’s favor. The currency appreciated roughly 20% against the dollar between 2005 and 2009 but Chinese authorities hit the brakes in the wake of the financial crisis.

Now, strong inflationary pressures — rising wages among them — and a push to boost domestic consumption are likely to lead to further gains for the currency and make Chinese labor even more expensive compared to the U.S.

But as companies again look to the U.S., a shortage of skilled labor may present the biggest bottleneck in coming years. Manufacturers already looking to fill open positions because of the export boom are expecting the need for skilled workers to balloon further over the next five years, according to an industry study by manufacturing services firm Advanced Technology Services. Of the 103 manufacturers of various sizes surveyed, 19% already have more than 15 open positions. But 41% anticipate having to fill more than 15 skilled positions five years from now as older workers retire.

Average ages for skilled trades workers are in the upper fifties and they are “retiring at a pretty alarming rate,” says Don Johnson, vice president at ATS. A dearth of vocational and high school training, along with low esteem for the field in recent years, has only heightened the shortage.

Abstract monetary policy tends to hog the spotlight when it comes to ways of boosting employment. Inflation remains muted but it’s difficult to see what more easing can do to really dent unemployment. Some economists rightly argue that focused measures to retool workers in battered industries would go much further.

“There are people who were great at building houses, but there have been big corrections in that market and now they can’t easily move between jobs,” says John Silvia, chief economist at Wells Fargo.

Indeed, even as manufacturing openings have boomed, construction openings tumbled to 67,000 in March compared to 100,000 a year ago according to JOLTS data. Equipping workers for the relatively well-paid jobs likely to return to the U.S., then, should be a much higher priority in bringing unemployment down.