What Would Happen To Michigan’s Communities If Ford And GM Left?

The United Auto Workers (UAW) has been striking for 14 days as its negotiations with the Big Three of Ford, General Motors
GM
(GM), and Stellantis drag on. There is speculation that these automakers may move some production out of Michigan to avoid future labor disruptions and lower their costs, especially if the UAW refuses to budge on its unrealistic wage and benefit increases. If these companies were to reduce their presence in Michigan, a recent study finds that their departures would likely alter the social capital of the communities left behind. However, with the right attitude and the right policies communities can successfully adapt to economic changes.

The UAW’s demands include a 36% pay increase, annual cost-of-living adjustments, a 32-hour workweek (but with 40 hours of pay), and the return of defined-benefit pension plans and retiree health care. Rachel Greszler of the Heritage Foundation estimates these changes would increase the hourly pay for UAW workers to as much as $58.98 per hour. This is likely unsustainable, as the average hourly labor costs for the Big Three are already over 27% higher than non-unionized automakers such as Toyota. It would be nearly impossible for Ford, GM, and Stellantis to compete with non-unionized automakers that have such a significant cost advantage.

Though it is still early, industry analysts say a prolonged strike could cause parts shortages and deplete inventory. If demand for cars stays high and the domestic automakers cannot deliver, Toyota, Hyundai, and others may be able to increase their market share. General Motors currently holds 17% of the U.S. market, the most of any company, but Toyota is not far behind at 15%. Hyundai, Honda, and Mazda would likely try to boost their market shares as well.

Any loss of market share coupled with permanently higher labor costs relative to the competition would force the Big Three to consider moving more production out of Michigan to lower cost areas such as the American south or Mexico. Such moves are not uncommon: Over the last 20 years, the Big Three closed 65 plants to remain competitive and better meet consumer demand while Ford moved its small-car production to Mexico. While these closures helped keep the automakers in business, there is evidence they also altered the surrounding communities.

In a study recently published in the Journal of Regional Science, Andreas Diemer analyzes the impact a decline in manufacturing employment has on a community’s social capital. Social capital is not an easy term to define, but broadly speaking it refers to the networks of formal and informal relationships and associations that strengthen communities and societies. Examples that fit under the umbrella of social capital include networks of friends or extended family, organizations like Moose International or the Knights of Columbus, parent teacher organizations, religious groups, sports teams, and even fantasy football leagues.

To motivate his study, Diemer notes that since 1975, the share of Americans agreeing that most people can be trusted, a proxy for social capital, has declined along with the share of employment in manufacturing (see figure below).

To test whether this is a coincidence or if there is a deeper relationship, Diemer looks at how changes in import competition from China, which puts pressure on U.S. manufacturing employment, impacts various measures of social capital in U.S. commuting zones. Commuting zones are like metropolitan areas in that they are designed to encompass a labor market based on how people commute to and from work.

Diemer’s preferred measure of social capital is the strength of an area’s organizational membership, which is measured by the density of community organizations within the commuting zone. Example organizations are civic and social associations; sport, recreation, and bowling centers; religious, political, and professional organizations; and membership clubs.

He finds that more competition from Chinese imports reduces the density of community organizations in commuting zones. This suggests that import competition that reduces manufacturing employment also reduces an area’s social capital. He also finds that more rural communities with more white residents experience the biggest declines in social capital.

To test the robustness of this result Diemer repeats his analysis using other measures of social capital including carpooling rates, religious participation, and voter turnout in presidential elections (a proxy for civic mindedness). Using these measures, he finds no evidence that import competition decreases an area’s social capital.

Despite the mixed results, I am inclined to believe that substantial declines in employment, such as a plant closing in a small town, diminish an area’s social capital, consistent with Diemer’s first test. Work-based friendships are common, and a steady income allows people to join clubs and pay for other leisure activities with friends and family. It makes sense that a big increase in unemployment would erode some relationships, at least temporarily.

A substantial decline in social capital is a problem. People are social creatures who desire relationships with others. Absent strong networks of friends and family, loneliness and its accompanying problems—depression, high blood pressure, and even dementia—can ruin lives.

Still, this does not mean we should prevent factories from closing or protect entire industries from international competition. The flip side to a plant moving out of Michigan is a new plant opening somewhere else and likely increasing social capital in its new location. Southern states have been the recipients of many new plants over the years.

The Big Three began investing in states such as Kentucky and Tennessee as far back as the 1950s. Ford plans to build many of its new electric vehicle plants in Kentucky and Tennessee rather than Michigan, in part because of those states’ lower energy costs. Industrial electricity costs are under 7 cents per KWH in both states compared to 8.31 cents in Michigan. Kentucky and Tennessee are also both right-to-work states, meaning workers in those states are not forced to join a union as a condition of employment. Research shows that right-to-work laws attract manufacturing jobs and improve workers’ life satisfaction.

From a national perspective, it does not make sense to prioritize a new Ford factory in Michigan rather than Tennessee. Federal officials should not try to tilt the economic playing field towards certain states, either via explicit policies or advocacy, such as President Biden’s recent trip to UAW’s picket line in Michigan.

For areas experiencing declines in employment and social capital, there are solutions besides protecting factories at all costs via economic development subsidies or other gimmicks that often do not work anyway. Creating a better environment for entrepreneurs by reducing taxes and streamlining regulations can enable new businesses to form or old ones to adapt to the changing landscape.

Take Hickory, North Carolina. From 1999 to 2009, the North Carolina furniture industry was decimated by lower-cost competition from abroad. Like other towns in the area, Hickory struggled to reinvent itself. But instead of trying to bring the old manufacturing jobs back, companies in the area shifted to making more custom furniture using higher-skilled workers. Now, these companies cannot find enough skilled workers to replace looming retirees despite the creation of a training program, Furniture Academy, at local Catawba Valley Community College. Hickory’s experience shows that adaptation is a key part of a community’s long-term success.

I suspect many who romanticize the manufacturing jobs of the past never worked in a factory. Work of any kind is a noble endeavor and should be celebrated, but certain jobs are more challenging and satisfying than others. Many manufacturing jobs are monotonous and fail to use the unique skills humans possess—abstract reasoning, problem solving, and the ability to cooperate. When such jobs are replaced by machines or move to less advanced countries it enables more Americans to do the things people are uniquely able to do. This is true progress.

The closing of a factory or plant may lead to some decline in social capital, but that does not have to be the end of the story. Places can reinvent themselves, and in the process build an even stronger community. If the Big Three decide to leave Michigan someday, its residents and policymakers should look forward and adapt, not long for the past.