Raw Cost Index

View Complete 2011 Structural Cost Report  Summary Foreword Chapter 1 - Raw Cost Index Chapter 2 - Corporate Tax Rates Chapter 3 - Employee Benefits Chapter 4 - Tort Costs Chapter 5 - Energy Costs Chapter 6 - Pollution Abatement Costs

Conceptually, the raw cost index for manufacturing is the ratio of wage compensation (which excludes benefit costs) to value-added in manufacturing.  It is explained in detail in the 2003 cost study (page 9). This metric captures wage costs directly (abstracting from employee benefits) and raw materials and capital costs indirectly (because increases in these will reduce value added and push up the raw cost index). Because it is calculated in home currency rather than U.S. dollars, changes in exchange rates have no effect on it by design.

• U.S. manufacturers enjoyed a raw cost index (which represents production costs that are under the direct control of manufacturers) than is 9 percent lower the trade-weighted average of their 9 largest trading partners. In all previous cost studies, the U.S. RCI was higher than the trade-weighted average of the 9 countries.

• The U.S. RCI was significantly lower than in 6 of the 9 trading partners.  Only Mexico, China and Taiwan had a lower RCI. The main reason is because U.S. manufacturers were much more nimble in downsizing their labor force in response to the 2008-09 recession. As a result, productivity growth continued to improve during the downturn, unlike in other countries where it is more difficult to shed workers.

• The gap with Mexico (36 percent) is not nearly as large as wage differentials might suggest, though it has widened somewhat since the 2008 cost study.  This is due to Mexican productivity improvements outpacing wage growth in recent years

• The gap with China (60 percent) is largely unchanged from the 2008 cost study, but because there is no updated data for China,  this number is unreliable.  We do know that average manufacturing wages in Chinese urban areas have increased by more than 40 percent since the 2008 cost study, but we have no reliable data on productivity trends since then, making calculation of the RCI impossible. However, it is highly unlikely that productivity grew by 40 percent since the 2008 cost study, implying that the China-US RCI gap is likely smaller than the data imply