Sunday, December 04, 2005

The manufacturing rat race

Last week, Brad DeLong speculated that one of the reasons that U.S. auto manufacturers faced such daunting legacy costs was that the wages and benefits paid to their employees reflected the expectation of maintaining oligopolistic profits.

I don't know that much about the auto industry, but I reckon that if those profits existed, they couldn't have lasted much beyond the 1970's.

But, in any case, the auto industry does illustrate the degree to which even a relatively sheltered industry (in terms of barriers to entry) is a rat race.

Taking some BLS data, I found that new cars today cost around 60% less in inflation and quality adjusted terms than they did in 1953 (the first year with data). This number is in line with the trend observed for durable goods as a whole.

This basically means that you face constant pressure to become more efficient or develop some type of competitive advantage to protect your pricing (such as better design or some other form of strong intellectual property). Obviously, U.S. car producers haven't kept up, at least with their Japanese counterparts, event though they've surely made huge gains in productivity over the last few decades.