Expert Commentary

What really determines whether a manufacturing firm locates and remains in California

2008 paper by California State University examines the state's manufacturing job loss and explores possible solutions.

Manufacturing plays a big role in California’s economy. About 10% of residents are employed in manufacturing, which generates $150 billion in value, and the jobs pay well: In 2004 the average income earned in manufacturing was $57,000, 54% more than the state’s median income.

Between 1990 and 2003, however, California has lost almost 400,000 manufacturing jobs. A 2008 paper by California State University, “What Really Determines Whether a Manufacturing Firm Locates and Remains in California,” examines the causes of this trend as well as possible solutions.

The study’s key findings include:

  • Factors that attract and retain firms include lower wages for equally skilled or educated workers, lower level of unionization on industrial activity, strong transportation networks and lower taxation on manufacturing firms.
  • Statewide economic development programs have a smaller-than-expected effect in reducing the outflow of existing manufacturing. A 10% decrease in business taxation is likely to increase manufacturing activity in the state by only 1.5% to 3.5%, assuming that other states do not match the offer.
  • Key business conditions that negatively affect manufacturing investment in California include concerns about the future of its skilled labor force, traffic congestion, relatively higher electricity rates and rising costs of workers’ insurance. Other factors are taxes, workers’ compensation costs and labor and housing costs.

Suggested policies that could retain and increase manufacturing investment in California include tax credits, transportation infrastructure and worker training/education.

Photo by Francine Orr of the Los Angeles Times.

Tags: California, infrastructure, taxation, labor unions

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