Regulations and manufacturing productivity

Despite Arkansas’ reliance on the manufacturing industry for economic growth and jobs, manufacturing within the state has languished. According to data from the Bureau of Economic Analysis, Arkansas’ manufacturing GDP has grown at an annual rate of less than 1% per year since 2002.

Over the same time period, the Bureau of Labor Statistics reports that jobs in the industry have been cut by more than 3% per year. Both of these statistics rank Arkansas last among the nine regional states – Alabama, Kansas, Louisiana, Mississippi, Missouri, Oklahoma, Tennessee, and Texas.

The source of the problem is insufficient labor productivity. As of 2013, Arkansas manufacturing employees were the least productive in the region with the typical worker producing less than $109,000 worth of output. This level of productivity is more than 23% less than the typical worker in Oklahoma. Because workers in Arkansas are the least productive among the neighboring states, they are also paid the least. The Bureau of Labor Statistics reported that the average Arkansas manufacturing employee earned a salary of $42,500 in 2013, a figure that is more than $9,000 less than counterparts in Oklahoma.

One reason for the lack of labor productivity within Arkansas is the high regulatory burden imposed by the state. The Fraser Institute’s annual Economic Freedom of North America report yields that Arkansas’ regulatory burden, as measured by government size, has been steadily increasing since 2005. When comparing Arkansas’ freedom score to that of its neighbors, Arkansas has consistently been ranked near the bottom. Only Alabama and Mississippi have been more burdensome than Arkansas year in and year out.

Research by the Arkansas Center for Research in Economics shows that regulatory burdens have a significant, negative impact on labor productivity. Strict regulations reduce productivity because they constrain the choice that manufacturers have when selecting production processes. When stringent emissions standards, licensing laws, and a myriad of other regulations are placed before firms, manufacturers have no choice but to use a limited number of production techniques. It is often the case that manufacturing firms are forced to use processes that are less efficient than the processes they would have naturally chosen given that they faced a lesser regulatory burden. With less efficient processes in place, it is inevitable that labor productivity suffers.

Unfriendly regulatory environments also create uncertainty in the marketplace, particularly when there is continuous growth in regulations. This uncertainty dissuades manufacturers from investing in new capital because firms want to be assured that what they are investing in will still meet regulatory requirements in the future. Increasing regulatory burdens removes the confidence that manufactures have, thus investment slows.

This is particularly troublesome for the manufacturing industry because workers rely on machinery and equipment to make them more productive. By investing in better equipment and machinery, the same number of manufacturing workers are able to produce more output than they previously were. Hence, increasingly strict regulations are detrimental to productivity, wages, and the overall growth of the industry.

By decreasing the regulatory burdens within the state, Arkansas will take a positive step towards becoming a regionally competitive environment for manufacturers. Lowering these burdens will give manufacturers the choice they need in determining efficient production processes as well as the confidence to invest in the equipment that is essential to maximizing productivity. This, in turn, will lead to faster growth and more, higher paying jobs in Arkansas’ manufacturing industry.