The last measurement of economic performance that this report
will consider is arguably the most important for the long-term health of the
state: the productivity of labor. For these purposes we use a measurement that
reflects the cost of labor to employers, the unit labor cost index calculated by
Moody’s Economy.com. This index reflects labor compensation relative to
productivity for each state.
This is not merely a measure of compensation per hour;
consequently, lower costs do not necessarily translate into lower wages or less
generous pension and health-care benefits. A high-wage state can be competitive
in this measurement as long as labor produces enough output to justify the
In 2000, Michigan’s unit labor costs were among the highest in
the nation, at 109.2. Only New Jersey had higher labor costs than Michigan.
Overall the average labor cost index for right-to-work states was 4.9 points
lower than for non-right-to-work states, meaning that labor was roughly 5
percent more productive in right-to-work states.
By 2005, Michigan’s per-unit labor costs had improved somewhat,
dropping to 105. But several other high-labor-cost states have also seen
improvements in productivity; consequently the only two states with higher
per-unit labor costs than Michigan are Massachusetts and Maryland. And the
advantage held by right-to-work states has grown to an average of 6.4 points.
While Michigan’s labor cost has been reduced somewhat, the state
remains at a significant disadvantage in this area. Unit labor costs are
arguably the single largest component in determining competitiveness. In
calculating its state business cost index, Moody’s Economy.com will use labor
costs as 75 percent of the overall index, more than all other factors combined.
Michigan’s high labor costs have a severe effect on the state’s
ability to attract and retain employers. A Mackinac Center review of
applications for business tax relief that were submitted to the Michigan
Economic Development Commission found that 66 percent of applicants listed the
costs of employment in Michigan as a reason they were likely to locate or expand
elsewhere. By comparison, only 40 percent mentioned taxes, 34 percent listed
building costs and 31 percent described economic incentives given by other
As communications and transportation become more advanced, the
opportunities for businesses to reach new markets have expanded greatly, but at
the same time so has the level of competition. In such an environment, it is
essential that labor costs be in line with labor productivity. Michigan’s high
per-unit labor costs are likely to remain a serious burden on the state’s
economy, dragging down both job creation and wages. Addressing this problem does
not mean reducing wages and benefits, but if high wages are to be preserved they
must be matched by high output, high quality and workplace flexibility.