Buying Jobs

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.

  1. 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.

  2. 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.

  3. 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.

  4. 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.

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Most Recent Comments

  • Hi Bill
    I’ve been reading your articles today and am quite intrigued by the straight forward logic of the articles. As an individual who wants to move to NS in a rural area such as Annapolis Valley I find many of the issues being dealt with are common to all provinces. Just because the prairie provinces resources are in demand doesn’t mean economic difficulty won’t come their way. Saskatchewan has been a no have province for decades until the world decided it needs its resource of potash, oil sands and grain. As an economics student of the early eighties I always found it odd that Canada considered themselves a resource nation and relied so heavily on resources as the main export of our nation. Although resources are for the taking, the employment opportunities are short lived. And when the favour of the resource reaches its peak the employment created to extract the resource runs dry real quick. Manufacturing, which should be the back bone of any advanced society should never have been given up as easily as it has. A worker in a manufacturing plant should never consider themselves to be worth more than someone in another part of the world doing the same job. Sorry, I don’t want to make enemies but we live in a global economy which means the wages become almost global as well. The point with this comment is that unionized manufacturing workers will continue to make concession to keep their jobs if they want to keep plants open in Canada.
    Which leads me to gov. employees. God help us if the public employees continue to rule the government coffers. Public employees are a vital contribution to the government. But as a percentage of the local population they should be no more than 10% of the total work force if not less. Also, public employees should be paid less than their private counter parts since they have better job security and benefits that the private sector is unfamiliar with in the past 2 decades.
    The next 2 decades will be full of changes for the public employees sector as well as the manufacturing sector. Expect more lay offs for both and the entry level positions to continue to receive less promises and perks.
    Reality sucks, but is not all bad. Competition will make provinces that except this reality become more lean and willing to join in the competition of the rest of the world. We have really smart people in Canada and I don’t see the government willing to engage in investment with born and raised Canadians to mitigate the risk of starting a manufacturing facility in Canada. And I don’t mean manufacturing as in plants with 200-300 employees, I mean the reality of the modern plant of 10- 20 employees; specialty manufacturing which adds value to a natural resource coming from Canadian soil. When was the last time you saw a Canadian furniture plant? We have lots of wood but it gets shipped half way around the world to create furniture that is sold to a cunuck. Talk about weird.
    I ranting, sorry. I can write more but Bill seems to do a fine job.
    Thanks Bill.

    David Kopriva | May 15, 2013

  • I hope (Wish) government follows the conversations on this site.
    A proactive approach would sure be preferable to the current “putting out fires” reactive response.
    The increasing Provincial debt represents nails in our provincial coffin when rates begin to rise.

    Peter McCurdy | May 5, 2013

  • Government should be first being the one party that acts as a body that over sees the industries by watching which ones are working and which are not and then where to best invest the public dollar .

    We have all these universities and yet how do we use them when it comes to helping with economic issues. Use them as research labs but also as think tanks .

    Government can’t make good investments unless it has it’s own market analysis and research capacity . Government has to have it’s own plan on an industry by industry basis . The municipalities seem to stay away from being aggressive at managing their localized economies .
    Here we are starting to dabble with changing the way we determine who should pay but don’t seem to have defined the problem or recognized the fact that they are often the culprits by not making sure every property is properly assessed , i.e all the illegal tourism rentals, then they don’t make allowances by using tax discounts or deferrals as a means of investing . It takes a big advantage for a major firm to relocate as did Electrolux , but they are a global company just as was New Page and had no real reasons to do anything that didn’t suit them. We have NS companies that should be our first place to invest . The province just decided to buy office supplies from an out of province source . Unless the savings are in the 10% plus range , likely a very risky decision as they’ll be loosing a certain amount of tax dollars and jobs as the NS suppliers in that market start to shrink and they’ll never come back .

    ps | May 4, 2013

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