Posted May 3, 2013
Nova Scotia is not the only jurisdiction to throw absurd amounts of money at prospective employers.
Consider the case of Electrolux. They started in vacuums but are also the second biggest appliance manufacturer in the world.
As reported by US broadcaster National Public Radio, Electrolux will shortly begin moving jobs from a town outside Montreal to Memphis, Tenn., where it will begin production of ovens and stoves in a brand-new, high-tech plant.
With the move, Electrolux will go from paying a base union wage of close to $19 an hour in Canada to roughly one-third less in Memphis. Employment is expected to grow to 1,200 over five years, but there is no guarantee as to how long the jobs will last.
For this, Electrolux will receive a tax breaks and cash totaling $188 million dollars from city, county, and state taxpayers. That approximately equals the full cost of building the plant. It is also about $152,000 per low-paying job.
In rationalizing the subsidies, politicians pointed to 2,800 existing jobs in nearby Springfield which might also have been lost to Mexico, the primary competing bidder, together with the always overstated spinoff effects.
They are not alone. Illinois paid fading retail giant Sears $168 million in 1989 to keep it from moving its head office and added $275 million for the same purpose in 2012, shortly before the company laid off 100 of its employees.
Auto makers locating in southern states have received incentives amounting to billions of dollars.
By comparison, Nova Scotia’s investments in Michelin over the years have looked prudent. It started in 1969 with a $50 million interest-bearing loan that was repaid. Subsequent incentives, primarily in the nineties, were grants or forgivable loans totaling $140 million of which $56 million was federal. That is still a lot of money, but the return on it has been good.
Nevertheless, virtually every attempt to replicate the Michelin experience has ended badly, the most recent example being the DSME Trenton windmill plant.
The recent US experience shows that the cost of attracting employers has grown dramatically as states seek to replace manufacturing jobs lost to Asia.
What distinguishes good job creation opportunities from bad ones?
It is typically whether we have something beside money to offer an employer, something that makes this a better location than China or Mexico, or a US state willing to offer huge incentives to attract low wage jobs.
- Skills: Do graduates from our post-secondary institutions have valuable capabilities? The recent announcements by IBM and Projex Engineering would not have occurred without the local source of engineers and IT professionals.
In contrast, the Memphis Electrolux plant was expected to hire untrained semi-skilled labourers. Likewise, we have very high turnover of contract call centers that come primarily for the incentives and often leave when they run out.
- Resources: Some of the best opportunities arise because of distinctive natural assets. The mink industry is now providing 1,000 badly needed rural jobs, especially in Digby County. It benefits from our climate and the ready availability of good feed from fish byproduct.
- Success: Existing employers who are doing well usually have strong management and have found a profitable nîche. Supporting them can often be a good idea. Efforts to save those that are struggling almost never succeed.
Well-known and financially sound national and international firms are usually a better bet than an entrepreneur with a great idea but not much money.
- Gradual support: The great attractiveness of the payroll rebate program is that we spend little if things don’t work out as planned. Employers who require large up-front capital investment by taxpayers usually do not succeed.
We should accept the fact that Michelin will require periodic incentives to keep equipment and training up-to-date. Equally, we should accept that there will probably not be a similar opportunity in future, particularly for rural Nova Scotia. We are not good at making big bets and should avoid them.