Labor and Energy Costs

Posted by PITHOCRATES - July 1st, 2013

Economics 101

If you want to Destroy an Industry and Kill Jobs all you have to do is Raise the Cost of Labor

What happened to American manufacturing?  The Industrial Revolution swept through the United States and made America an industrial superpower.  By the beginning of the 20th century the United States became the world’s number one economic power.  Immigrants poured into this country for those manufacturing jobs.  Even though some of these jobs may have come out of a Dickens novel.  Because being able to eat had it all over starving to death.  And in America, with a good factory job, you could put food on your family’s table.

Most of those manufacturing jobs are gone now.  Why?  What happened to the once booming textile industry?  The once booming steel industry?  The once booming automotive industry?  Unions happened to them.  That’s what.  These jobs were so horrible and unfit for humans that unions stepped in and organized them.  But the jobs never got better.  Based on the ever more generous union contracts they kept demanding.  Increasing the cost of labor more and more.  Which chased the textile industry out of the country.  And much of the steel and automotive industries as well.

Is there anything we can learn from this?  Yes.  If you want to destroy an industry, if you want to kill jobs, if you want to damage the economy, all you have to do is raise the cost of labor.  The largest cost to most businesses.  Which is why many businesses have been replacing people with machines.  Advanced machines.  Computer-controlled machines.  Robots.  Because they can work 24/7.  They’re never late.  Never hung over.  Never out sick.  They don’t take lunch.  And they will work as fast as possible without ever complaining.  This is why businesses like machines.  For they let them lower their costs.  Making them competitive.  So they can sell at prices lower than their competitors.  Allowing them to remain in business.

Uncompetitive American Manufacturers go to Emerging Economies where they can be Competitive

Labor is a big cost of business.  Especially in an advanced economy.  With a high standard of living.  Where people own houses and cars.  Where those houses have central heat, air conditioning, televisions, sound systems, kitchen appliances, washers and dryers, etc.  These things cost money.  Requiring paychecks that can afford these things.  As well as pay for clothes, groceries, gasoline, utilities, etc.  Common things in an advanced economies.  But not all that common in an emerging economy.  Where factory workers aren’t accustomed to those things yet.  And don’t demand paychecks that can pay for those things.  Yet.

Still, people in developing economies flock to the new factories.  For even though they are paid far less than their counterparts in advanced economies these factory jobs are often the highest paying jobs in their countries.  And those who have these jobs have a higher standard of living than those who don’t.  Even when the occasional factory burns to the ground or collapses killing everyone inside.  As sad as that is.  But if you want to eat and provide for your family these factories often offer the best opportunity.

So this is where American manufacturing jobs go to.  Where labor costs are lower.  Allowing business to stay competitive.  Because if they can’t be competitive no one will buy what they are selling.  And without any revenue they won’t be able to pay their suppliers.  Their employees.  Or their energy costs.  Another large cost of business.  Especially for manufacturers.

Unions and Regulatory Costs haven’t made Emerging Economies Uncompetitive Yet

A lot of houses today come with a 200-amp electric service.  Assuming a house uses about 100 amps on average that comes to 24,000 watts (100 amps X 240 volts).  Now consider a large manufacturing plant.  Like an automotive assembly plant.  That can have anywhere around 8 double-ended unit substations.  Which are pieces of electrical distribution equipment to feed all of the electrical loads inside the plant.  Each substation has two 13,800 volt 3-phase primary electrical services.  If you’re looking at one you will see the following from left to right.  A 600-amp, 15,000 volt switch, a transformer to step down the 13,800 voltage to 480 voltage, a 480-volt main switch, a bunch of 480-volt switches to feed the electrical loads in the plant, a ‘tie’ switch, another bunch of 480-volt switches, another 480-volt main switch another transformer and another 600-amp switch.

The key to a double-ended unit substation are the two 480-volt main switches and the tie switch.  Which normally distributes the connected electric load over the two primary services.  With both 480-volt main switches closed.  And the tie switch open.  If one service fails because a car knocks down a cable pole these switches will sense the loss of that service.  The 480-volt switch on the side of the failed service will open.  And the tie switch will close.  Feeding both sides of the unit substation on the one live primary service.  So each primary service carries half of the connected load.  Or one primary service carries the full connected load.  Assuming each unit substation uses 600 amps on average (2 services at 300 amps or 1 service at X 600 amps) that comes to approximately 13,194,070 watts (600 amps X 13,800 volts X √3 X .92 PF).  Where we multiply by the square-root of 3 because it is three phase.  And assume a 0.92 power factor.  If a plant has 8 unit substations that comes to 105,552,562 watts.  Which equals approximately 4,398 houses with a 200 amp service.  Now to further our crude mathematical approximations let’s take a typical electric bill for a house.  Say $175 on average per month.  If we multiply this by 4,398 that comes to a monthly electric bill for this manufacturer of about $769,654.  Or $9,235,849 per year.

So here is another way to destroy an industry, kill jobs and damage the economy.  By increasing the cost of electric power.  Which is already a very large cost of business.  And ‘going green’ will make it even more costly.  As the Obama administration wants to do.  With their war on coal.  The cheapest source of electric power we have.  By increasing regulations on coal-fired power plants.  Even implementing some kind of a carbon tax.  To punish these carbon emitters.  And to subsidize far more costly green energies.  Such as solar.  And wind.  Going from the least costly to the most costly electric power will greatly increase a business’ electric utility costs.  Easily adding 15%.  30%.  40%.  Or more.  A 40% increase in our example would increase the electric utility cost by $3,694,340 each year.  If a plant has 1,200 workers that’s like adding another $3,000 per worker.  And we’ve seen what higher labor costs have done to companies like General Motors.  Chrysler.  And the textile industry.  By the time you add up all of these new regulatory costs (Obamacare, green energy, etc.) businesses will be so uncompetitive that they will have to follow the textile industry.  Out of the country.  To a country that will let them be competitive.  Such as an emerging economy.  Where unions and regulatory costs haven’t made them uncompetitive.  Yet.

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