Monday, December 08, 2008

Loss of Big Three Would Cost Wisconsin 85,000 Jobs

A new research study from the Economic Policy Institute says that if the big three automakers go out of business it will cost Wisconsin about 85,000 jobs, and drive our unemployment rate up an additional 0.8%. Not good.

EPI is a somewhat left-leaning think tank which receives some of its funding from labor unions, and the study will undoubtedly be attacked for that reason. But the question should be if EPI's methodology is justified, and therefore if its estimates are accurate. I'm not an economist, but here's what I found when I researched the numbers.

EPI breaks job auto-industry dependent jobs into three categories: Direct, indirect, and re-spending. Direct jobs are the 123,000 people who work for the Big Three. Indirect jobs are in industries that supply parts, materials, and services to the Big Three. EPI estimates indirect jobs by looking at how much the Big Three spend on parts, materials, and services as a proportion of the total income of those industries in the US. Pretty straightforward, and EPI comes up with 650,000 indirect jobs.

Re-spending jobs are those that result from the roughly 775,000 workers in direct and indirect jobs spending their salaries. Here's where it gets trickier. EPI calculates a re-spending multiplier of 1.7; in other words, every auto-industry job results in an average of 1.7 jobs in the consumer retail and service industries. Sounds reasonable, and certainly within the range of similar economic studies, but EPI doesn't really explain how they derived it. The reference they give is to the appendix of another EPI paper that doesn't have anything to do with the specifics of the auto industry. So although the 1.7 number is probably in the ballpark, it's the easiest thing in the paper to attack because EPI did a lousy job justifying it.

Anyway, taking everything together, EPI estimates that 2.1 million US jobs will lost of the Big Three go under. And a big bunch of those jobs will be right here in Wisconsin.

If you're wondering why Republicans seem so reluctant to help US automakers, yet just a few weeks ago were tripping over themselves to throw money at banks and insurance companies, the EPI study provides a clue. Can you guess which part of the US the will be least damaged by a failure of the Big Three?

Turns out it's Washington DC...


Dad29 said...

EPI is a Big Labor outfit, not "somewhat left."

And 85K jobs? I doubt it; you think that nobody will buy batteries? Spare parts? NOBODY?

Right now, new vehicle sales are almost irrelevant, anyway; a BK and re-org will be the best thing ever to happen to the Big 2.0000015.

Yes, there will be some problems. So?

Anonymous said...

Besides, using statistics that are based off of the Big 2.5 going "Out of Business" are pure scare tactics anyway.

The Big 2.5 would enter into Chapter 11 bankruptcy, which is not liquidation, but rather reorganization.

Under Chapter 11, the debtors of the company (those to which the company owes money) would be given control under judicial oversight of a bankruptcy court. The debtors would then be allowed to reorganize the company, fire the management and replace it if they wish, and so what it takes to make the company liquid again in an effort to get their money back.

This is probably the best outcome for all concerned, as many of those 85,000 would get to keep their jobs. Would all of them get to? Probably not, but thats ok. They would just have to find a job with a different company that was profitable.

Russell Wallace said...

Dad29, you're so far right Fox News probably looks like a liberal conspiracy to you. EPI, while certainly leaning left, is solidly in the mainstream of US economic think tanks. Unlike, for instance, your favorite, the American Enterprise Institute.

Yes, people will still buy batteries and spare parts. But if the Big Three go under so will many, if not most, of their suppliers, so those parts will likely end up imported from China. US manufacturers generally operate on very slim margins, and it won't take much to sink them.

Nick, if you have better numbers feel free to post them. Just because you don't like something doesn't mean it's a "scare tactic".

A big problem with letting the automakers go bankrupt is that doing so will kill off many of their suppliers as the automakers halt or delay payments. Once the supply chain is broken it would be extremely difficult to get things running again. Talk to anybody who does procurement for the auto industry if you don't believe me.

Of course, bankruptcy would cripple or destroy the auto unions, which is probably what both you guys really want. Like it or not, unions are largely responsible for building the American middle class, and the right's willingness to sacrifice the middle class in order to achieve the their ideological goal of getting rid of unions just mystifies me.

Russell Wallace said...

Good article in today's NYT about the problems parts suppliers to the automotive industry are facing:

Backs up my arguments, and makes that point that many of the Big Three's suppliers also sell to foreign auto manufacturers with US plants. If the suppliers fail it's going to whack Toyota and Honda and all the other non-union foreign-owned plants.