Closing in on Plant Closings

Fugitive Industry: The Economics and Politics of Deindustrialization, by Richard B. McKenzie, Cambridge, Mass.: Ballinger; San Francisco: Pacific Institute for Public Policy Research, 281 pp., $29.95/$11.95

Are the Northeast and the Midwest, the so-called Frostbelt, dying? Is the rise of the South and the West, the so-called Sunbelt, due to the closing of manufacturing plants in the Frostbelt? If companies were forced by law to give long advance notice and to make large payments to employees whenever they closed a plant, would this necessarily benefit workers?

These questions and more are taken up in Fugitive Industry, written by economist Richard McKenzie of Clemson University. His answers may surprise a lot of readers.

Advocates of laws making it difficult and costly to close factories claim that plant closings, contractions, and relocations eliminated over 15 million jobs in the United States between 1969 and 1976. But McKenzie points out that these lost jobs were more than compensated for by 24 million jobs created over that same period. Moreover, while manufacturing employment in the North fell by 1.6 million during that time, total employment (excluding agriculture) increased by 1.9 million. McKenzie shows that between 1965 and 1980, total nonagricultural employment increased in all major regions of the country—even in northeast industrial cities such as Akron, Detroit, Youngstown, and Cleveland, which are supposedly the epitome of industrial decline.

Nor was the net loss of manufacturing jobs in the Frostbelt caused by a higher rate of job loss than in the Sunbelt. Rather, it was due to a lower rate of job creation. Moreover, McKenzie points out, over 98 percent of job losses in the Frostbelt between 1969 and 1972 resulted from companies scaling back or shutting down operations. Less than 2 percent were caused by companies moving to greener pastures. So much for the widespread belief that the Sunbelt is prospering at the expense of the Snowbelt.

Unfortunately, McKenzie fails to point out that the Frostbelt's industrial problems are concentrated in autos and steel, where very high wages prevail. In 1970, hourly compensation for auto and steel workers was about 30 percent higher than the average for all manufacturing employees. But by 1981 the difference had grown to 50 percent for auto and 70 percent for steel workers.

Do plant-closing laws benefit workers? McKenzie says no. Such laws, to the extent they prevent closings, tie up capital that could have been used to create new jobs. Unfortunately, this effect is not readily apparent. Consequently, workers who remain unemployed because new jobs are not created don't realize why few new jobs exist. So they don't lobby against plant-closing laws. On the other hand, workers who already have jobs, and hope to keep a lock on them with plant-closing laws, lobby very effectively.

In criticizing plant-closing laws, McKenzie makes one argument that does not make sense. He claims that such laws could themselves cause some individual plants to close: if a plant is doing badly and there is no law, the company might hold out in the hope that demand will pick up; but if there is a law that imposes a cost on the company for closing its plant, the company will be more likely to close it. McKenzie's logic here is obscure, for a company would be more likely to keep the plant open if its managers faced a penalty for closing it. McKenzie could reasonably claim, though, that if companies anticipated enactment of a closing law they would be more likely to shut down a marginal plant to avoid future penalties.

Often, worry about plant closings comes down to a perception that it's unfair to lay off employees who have spent years of their lives working in one plant. But, counters McKenzie, the supposed unfairness depends on what the employer has promised. If he has assured his workers that their jobs are secure for a long time, then it is unfair to close the plant suddenly. But when an employer breaks such a commitment, his employees have a just grievance that can be handled by the courts.

When an employer has made no such promises, why, asks McKenzie, is it "unfair" to close the plant suddenly? In such cases, the employer generally has to pay higher wages to compensate his employees for the higher risk of losing their jobs. For this reason, it is plant-closing laws themselves that are unfair. They force an employer to overcompensate his employees by first paying them wage premiums that reflect the risk that their jobs might end and then not being able to close the plant as quickly as anticipated when the premium wages were agreed to.

Of course, as McKenzie points out, employees would be overcompensated only in the short run. In the long run, employers would insist on paying lower wages to make up for their reduced flexibility, so employees wouldn't necessarily benefit overall. In fact, they might lose. After all, they are always free to bargain for lower wages in exchange for less management flexibility to close plants. Employees who opt for higher wages must want that more than they want job stability. But plant-closing laws would prevent them from making that trade-off.

One caveat is in order. While the reader will probably find most of McKenzie's arguments persuasive and his evidence convincing, there are some real problems with his book. It is wordy and plodding and too seldom incisive. The book clearly needed a good editor. Also, McKenzie fails to present some evidence that strengthens his case. Some of the best evidence appears only in the brief foreword by economist Finis Welch.

Nevertheless, the issue McKenzie deals with is important. Restrictions on plant closings are already in force in Maine and Wisconsin and in Philadelphia. And the debate over such laws continues. McKenzie's Fugitive Industry provides a valuable source for learning more about the case against such restrictions.

David Henderson recently left the staff of the Council of Economic Advisers to return to teaching.