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Manufacturing Industry - Total Employment Costs

November 2007

Introduction

Based on data acquired from the (External) Annual Business Inquiry conducted by the Office for National Statistics, this paper looks at the total employment costs borne by manufacturing industry in Lancashire as represented by the amounts paid during the year to employees. These include all overtime payments, bonuses, commissions, payments in kind, benefits in kind, holiday pay, employer's national insurance contributions, payments into pension funds by employers and redundancy payments less any amounts reimbursed for this purpose from government sources. No deduction is made for income tax or employees' national insurance contributions, etc. Payments to working proprietors, travelling expenses, lodging allowances, etc, are excluded.

The level of such employment costs can represent a considerable competitive element in the modern global economy, particularly in the case of the more mature and labour intensive manufacturing sectors. Typically employment costs in Western European Union countries such as the UK are three-to-four times those in the east of the EU. At the extremes, costs in the most expensive countries (e.g. Belgium, Sweden) are over eight times those in the least expensive countries (e.g. Lithuania, Latvia). Looking further afield, employment costs in China or India can be as low as a twentieth of those in the UK. Such cost differences represent a major competitive driving force in influencing business investment and labour relations.

Manufacturing Total Employment Costs

The main way in which the wealth (GVA) generated by Lancashire manufacturing industry is retained locally is through the payment of wages and salaries to the manufacturing workforce. In 2005 manufacturing industry in the sub-region paid out gross wages and salaries to its workforce (i.e. before deduction of income tax or employees national insurance contributions, etc.) of over £2.6bn. This was equivalent to 3.1% of the national manufacturing wage bill or about 50% of industry-generated gross value added. In real terms (i.e. inflation adjusted) the total manufacturing wage bill in Lancashire was about 8% higher than a decade earlier but some £573m lower (-18%) than at its last peak in 1998, reflecting the steady contraction in the number of people actually employed in the production industries (Table 1). Relative to the UK Lancashire has seen a lesser drop in employment costs over the decade, possibly reflecting the strong structural shift away from the more traditional sectors to higher wage and more productive industries.

Bar chart showing employment costs for fourteen manufacturing industries in Lancashire in 2005 - see text for details Source ONS - Annual Business Inquiry

Viewed by industry, the Transport Equipment sector (mainly motor vehicles and aircraft) has by far the largest wage bill accounting for around 29% of all Lancashire manufacturing industry employment costs in 2005, compared with a share of 13% in the UK (Figure 1). No other single industry group accounts for more than 10% of the Lancashire total, the most important being Fabricated Metal Products, Food & Beverages and Paper Printing & Publishing. Reflecting their steady contraction, the share of employment costs assumed by the Lancashire textile, clothing and footwear industries in 2005 was only a half of that a decade earlier.

Manufacturing Total Employment Costs per Head

Graph showing how manufacturing employment costs per head have changed in Lancashire from 1995 to 2005 - see text for details Source ONS - Annual Business Inquiry

Viewed in comparative terms, for those employed in manufacturing industry, payments of gross wages and salaries (employments costs) per head in have risen steadily over the past decade: in real terms in Lancashire from around £18,800 in 1995 to about £25,600 by 2005, an increase of more than a third, exceeding the rate of increase nationally (Figure 2).

Over much of the 1980s manufacturing employment costs per head in the Lancashire region were consistently about 5% lower than the UK average. In large measure this situation reflected structural considerations, that is to say, a higher local representation of lower wage industries. The buoyancy of manufacturing locally in the late 1980s/early 1990s (particularly in the high wage Other Transport Equipment) helped to raise local wage rates to a near par with the nation. Subsequently the pattern became more volatile with a relative deterioration in Lancashire earnings levels compared with the UK. To a large degree this out-turn was the result of major restructuring and downsizing within some of the higher paying industries like aerospace, motor vehicles and chemicals, particularly within the western half of the County. More recently, with recovery in these sectors combined with a much lesser weighting from some of the lower wage labour intensive sectors as they have struggled against overseas competition and seen employment levels fall, the balance has shifted back to some extent. In 2005 total manufacturing employment costs per head in Lancashire manufacturing were only marginally (3%) below the UK average (Table 2).

Manufacturing Employment Costs per Head by Industry

Bar chart showing employment costs per head for fourteen manufacturing industries in Lancashire, averaged from 2001 to 2005 - see text for details Source ONS - Annual Business Inquiry

There is considerable variation in the level of employment costs per head across different industries in Lancashire (Figure 3). Averaging the data over the five-year period 2001-2005 to allow for fluctuations in data quality, the highest earnings sectors in Lancashire - Nuclear Fuels, etc and Transport Equipment (most especially the aerospace component), had average employment costs per head more than double those of the lowest paying Leather & Leather Products (largely footwear) and Wood & wood Products industries. Generally speaking, the highest paying industries were Chemicals and most of the engineering sectors. The lowest paying industries which, as well as Footwear and Wood Products, included Textiles & Textile Products and Other Manufacturing (mainly furniture), are generally of a lower capital intensity and/or employ a larger share of female workers, many of whom work on a part-time basis.

In comparison with the UK five out of the fourteen identifiable sectors of local industry enjoyed a level of earnings or employment costs higher than their national equivalents averaged over the period 2001-2005 (Table 3). Not unexpectedly, these included the key Transport Equipment sector dominated locally by aerospace production. Because of its high wage rates in absolute terms and its size, this industry has a major impact on manufacturing employment costs levels right across the sub-region. Textiles (which in absolute terms is one of the lowest paying industries in Lancashire) is also placed comparatively favourably with earnings 9% higher than in the national industry. The other above-par local sectors include Non-metallic Mineral Products dominated by a handful of capital intensive larger companies, and Rubber & Plastics Processing. The position of the latter reflects steady earnings growth over the past decade and appears to reflect a sustained move into higher value added and more competitive products. The nationally high wage industries of Chemicals, Paper & Printing and Electrical & Optical Equipment (and probably also Motor Vehicles – not shown separately in Figure 3) were particularly notable for their comparatively poor local wage rates, due in some measure to the local bias towards the lower value added market sectors.

The move towards higher value added production across much of Lancashire's manufacturing sector over recent years appears to have significantly improved the sub-region's competitive advantage in terms of unit labour wage costs. For manufacturing as a whole, such unit wage costs (i.e. employment costs expressed as a percentage of gross value added) have fallen to well under the UK average. A large part of this improvement has been attributable to the aerospace contribution but nearly all sectors have contributed to some degree.

Manufacturing Employment Costs per Head by Sub-Region

Bar chart showing employment costs per head in the manufacturing industry for Lancashire and its local authorities, averaged over 2001 to 2005 - see text for details Source ONS - Annual Business Inquiry

By sub-region manufacturing employment costs per head in East Lancashire averaged over the 2001-2005 period, at £23,200, were 10% lower than the UK average whilst in Lancashire West, at £27,100, they were 6% above. To some degree such variations in employment costs are a function of productivity reflecting the structural make-up of the industries in each of the sub-regions. Thus, in East Lancashire employment continues to have a greater representation in the lower earnings sectors which often include a large proportion of female and part-time workers and which in the main are relatively labour intensive and of a lower value added nature. Although East Lancashire's second biggest employing industry, Textiles & Textile Products has wages and salaries per capita well above those paid by the industry nationally, in absolute terms it is still amongst the lowest paying of all industries. Higher per capita earnings in Lancashire West are for the most part attributable to the high proportion of workers in the comparatively higher paying industries, most notably in Transport Equipment (principally aerospace) and Nuclear Fuel Production together with a lower representation of sectors at the lower end of the wage scales.

Manufacturing Employment Costs per Head by District

The dispersion of manufacturing employment costs is also pronounced at the county district/unitary level - wages and salaries per head in Blackpool and Rossendale, for instance, were nearly a fifth below those in the UK and were less than 60% of those in the highest earnings Fylde District (Figure 4). Just three districts had manufacturing earnings above the UK average. Again, it is probable that structural/sectoral factors are the key reason for such variations.

This page was compiled by Peter Kivell .

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