If Apple Onshored iPad Production it Would Create 67,000 American Manufacturing Jobs!

Forbes

That's the conclusion reached in this study here, that if Apple brought the assembly line for the iPad onshore into the US, that it would create 67,000 manufacturing jobs right here in America.

Which is a very nice thought but it wouldn't actually work out that way. For boring reasons that I shall explain in a moment.

I was alerted to the calculation by John Briggs in the comments to this post, where I expressed (with a slight tongue in cheek I will admit) surprise that Apple was now actually buying its chips from a fab in the US. I have to say that I like parts of John's post and calculation (in English English we would refer to it as "a curate's egg" for reasons to do with a very unfunny 19th century cartoon) and would gently suggest that there are some errors in other parts of it.

But that's OK, error is nothing to be ashamed of, it's how we learn things. You readers have taught me things I didn't know for which thank you and please keep doing so: just as John taught me something in his post.

The bit that I like is that John didn't take someone else's numbers on faith, rather, he went off, looked them up, thought about them for a bit and substituted the ones he thought fit the circumstances better. As in here:

I clicked on the U.S. Bureau of Labor Statistics citation Mr. Thompson cited to in his article. The $32.53 hourly rate he cited was for “goods producing workers” who are workers in the mining, construction and manufacturing industry groups. That seemed like a fairly high rate for workers assembling electronic equipment like iPads. So, I dug a bit deeper, but I didn’t need a very big shovel. I went to the U.S. Bureau of Labor Statistics web page for Computer and Electronic Product Manufacturing. I scrolled down to table 5 entitled Median hourly wages of the largest occupations in computer and electronic product manufacturing, May 2008. There I found the U.S. median hourly wage rate for electrical and electronic equipment assemblers, which pretty accurately describes the work done by all those Foxconn workers assembling iPads. It wasn’t $32.53 an hour as stated by Mr. Thompson, but rather $13.34 an hour.

That's good, excellent work. John then recalculates what the iPad would have to cost if it were made with US labour and says:

Using the correct labor costs of assembling an iPad 2 in the U.S., an iPad 2 made in the U.S would cost $445 ($325 for parts + $120 for labor), as opposed to a Chinese iPad’s cost of $335 ($325 for parts + $10 for labor).  Assembling the iPad 2 in the U.S. and selling it for $729 would  bring Apple’s gross margin down to 39%, not the 15.25% cited to by Mr. Thompson.

And finally we get:

Apple sold almost 15 million iPads last year. Do the math. 15 million x 9 hours. 135 million hours of work for U.S. electronic equipment assemblers assembling iPads for you and me. A full time electronic equipment assembler works about 2000 hours a year (40 hrs x 50 weeks) 135 million hours of work divided by 2000 equals full-time work for 67,500 U.S. workers. And all we have to do is to convince Apple that a 39% margin, as opposed to a 54% margin is acceptable. Hell, I’ll split the difference with Apple. I will pay $784.oo for an iPad 2 made in this country if Apple will agree to live with a 46% margin. What could be more fair than that?

OK, nice little piece of work with the calculator and the references and yet the final conclusion is in fact wrong (sorry John, but it is). So what went wrong in the calculation?

The first thing is that the two different wage rates being discussed are not the same thing, not the same thing at all. The $10 cost of labour in China is from this paper. And it is not the wages that the labourers get paid. Rather, it is the cost to the manufacturer of the labour. The US number for what electronics assembly labour gets paid is just that, what they get paid. It is not the total cost to the manufacturer of employing them.

The difference is that in the US (and I'm afraid I know nothing about Chinese wages at this level of detail) the cost to the manufacturer is not just the hourly wage. On top of that there is employers' Social Security to pay, matching pensions contributions perhaps, certainly there will be some form of health care. I don't know for certain but I doubt these are things offered in China.

We could say, well, we've estimated the hours it takes to assemble from the $10, and when we multiply that to give us 9 hours of US labour, well, it all comes out in the wash. I don't think it does, quite, but since John is writing a book on this subject I want to emphasise it to make sure that he corrects that mistake throughout the manuscript. Wages paid are simply not the same as cost of labour to the employer. Not in the US they're not at least. Add 30-50% to your figures to adjust as a rule of thumb.

The other problem is more a philosophical one. We cannot just look at the onshoring of jobs in isolation. Yes, I know, lots of economics assumes ceteris paribus ("keeping other things equal") but the point about the real world is that paribus isn't ever ceteris.

Allow me to impose one unrealistic little assumption as we start, to make the numbers and logic a little easier. All Apple iPads are sold in the US. I know, I know, just bear with me for a little bit. (We'll also ignore that pesky thing about wages and costs of labour and run with John's numbers).

So, we have 15 million iPads being built, all sold in the US, all assembled in the US, all at those $13 and change an hour rates and producing 67,000 jobs in America. Yes, obviously, that's 67,000 happy people with happy families and so on. But what else do we have?

Well, if we get Apple to agree to cut their profit margin and sell the iPads at the regular price then OK, we do get 15 million sales and so on.   However, we've just cut $1.8 billion (15 million x $120) off Apple's profits. Apple currently trades at a price earnings ratio of 13 or so which means we've just cut $25 billion (using rounded numbers here) off Apple's value on the stock market. Which would create quite a few unhappy people really. And it's not just that. There's something called the wealth effect: when people feel wealthier they spend more money. People spending more money creates more jobs and the reverse is also true. A fall in perceived wealth restricts spending and reduces the number of jobs. No, this isn't just rich people selling their Apple stock to spend in the stores, this is a well known psychological effect of increased wealth in the society in general.

We've just been through it with housing in fact, in the boom house prices went up and people went on a spending spree. A large part of our current problem is that houses in the US are now worth around $9 trillion less than they were. This really does depress spending. It, err, causes a recession in fact.

OK, so, what if Apple maintained its margins, so that we didn't have this wealth effect? OK, with the higher prices we're going to need to sell the iPad at $967. Which leads us to two possible outcomes.

The first is that iPad sales tumble horribly. Because everyone goes off and buys a Samsung Tablet, something based on Google's Android, a Kindle Fire from Amazon, just something else. At which point we might find that we've not created a single job at all as no one at all is buying an iPad.

Or, hey, let's say that as John says, we'll split the difference? Apple gets to make the same dollar profit per machine, but pays the higher wages. And pretend that sales are just what they are, 15 million. Well, all that we've done there is shift $1.8 billion from the pockets of iPad buyers to the pockets of the people assembling iPads. Which might even be a good idea: but remember, US consumers now have $1.8 billion less to spend on everything else. Which will mean job losses everywhere else.

OK, we can relax the idea that all iPads are sold in the US now. This problem doesn't happen with those that are exported, or at least the problem is much smaller and happens in a different manner. But it's still there for those that are bought inside America.

What we get to in the end is what Frederic Bastiat (one of the few Frenchmen ever to actually get economics) tried to tell us all 160 years ago. You've got to look for the hidden, not just consider what is out there in plain sight.

So, if we onshore iPad production there will be these 67,000 jobs. Those 67,000 we can see that is. But if Apple cuts its profit margins to do it then jobs (some number, unknown) will disappear somewhere else as a result of the reduction in those profits and the value of Apple as a company. If Apple keeps its margins and raises prices to do so then obviously iPad sales will fall, meaning we won't have the 67,000 jobs. And if Apple just makes the same profits, lower margins but raises prices by enough to cover on the higher labour bill, then we've simply a transfer from buyers to makers of iPads. And those buyers having less money to spend will mean job losses elsewhere.

Finally, there is actually no "right answer" here. Which of these possible outcomes is the "best" depends not on any irrefutable scientific laws. It depends rather upon your personal view of what is the most desirable outcome. Maybe you think more jobs you can see and know about is more important than the lost jobs that we can't see or know about. Maybe you think that jobs for Americans is more important than cheap iPads for Americans.

My own, entirely personal, view is that we're trying to run the economy for consumers, not producers. So I place much more emphasis on the cheap production methods than perhaps you do. But as I say, this is more about the values that you bring to the start of the economics than it is about the economics itself. So you're entirely allowed to disagree with my conclusion: as I am with your of course.

And John: we don't know the full effect of all of these changes, only the general direction for one or two of them in terms of jobs. But it really is true that onshoring production in the way you calculate will not produce 67,000 US jobs. It might, possibly, create 67,000 that we can see, but it will also destroy some unknown number that we cannot see. That unknown number quite possibly being higher than the jobs created that we can see.

 

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