Manufacturing’s Share of Workers’ Comp Premium Is High Relative to Exposure, NCCI Says

In 2016 in the United States, the manufacturing sector produced nearly 72 percent more goods than in 1990, but manufacturers achieved that milestone with only about 70 percent of the workers that were on factory floors two and a half decades ago, a recent report shows.

The statistic is important to the workers’ compensation insurance industry because manufacturing nationally “makes up a disproportionate share of premium …. relative to exposure,” at 15 percent and 8 percent, respectively, according to the Quarterly Economics Briefing published by the National Council on Compensation Insurance (NCCI) for the first quarter of 2017.

The growth trend in manufacturing output compared to manufacturing employment has gone on for decades, but output reached a record high in 2016, NCCI reported. The sector employed more than 12.3 million workers last year.

Midwest, South Central and Southeast states have a higher concentration of manufacturing activities than states in the West, Mid-Atlantic and Northeast. Arkansas, South Carolina, Kansas, North Carolina and Nebraska produce a higher volume of nondurable goods, such as food, apparel and paper products, while Michigan, Mississippi, Kentucky and Ohio, produce more durable goods like furniture, appliances and cars, according to NCCI.

“The key functional distinction between the two categories is that demand for durable goods is more of an investment decision, and demand for nondurable goods is more of a consumption decision,” the NCCI’s Quarterly Economic Briefing states.

Because of that distinction, all states with high manufacturing employment may not be impacted by changes in economic conditions in the same way. For instance, states with a higher concentration of durable goods manufacturers may be more sensitive to economic slowdowns because the “demand for durables can be expected to exhibit greater cyclical volatility than nondurables,” the report states.

“For example, states with high concentrations in auto manufacturing may be harder hit during a recession than states with high concentrations in food manufacturing,” the report states. Therefore, the impact on workers’ comp premiums, frequency and severity in durable goods manufacturing states could be greater than in states with higher concentrations of nondurable goods manufacturing.

Much of the decline in manufacturing employment can be contributed to two factors: an increase in automation and the development of decentralized supply chains.

Automation, which may include computerized machines, streamlined processes and robots, is the primary driver of decreased employment in manufacturing, NCCI concludes. But it has reduced the cost of manufacturing goods and made U.S. manufacturers more competitive. Decreased labor costs, increased labor productivity and increased worker safety are among the reasons companies say they have moved to more automation in manufacturing processes.

Manufacturers also have been able to lower costs “by producing and assembling different components in different locations,” the report states. But the trend has also impacted the employment rate in U.S. manufacturing due to production that takes place outside the U.S.

“The North American Free Trade Agreement (NAFTA), effective since 1994, has allowed domestic auto manufacturers to reduce costs by producing in neighboring countries rather than overseas, leading to a supply chain that spans the United States, Canada, and Mexico. The US automotive industry provides an example of decentralization in the modern manufacturing supply chain,” according to the NCCI report.

Still, automation remains the primary reason for manufacturing job losses. The report cites a Ball State study that found that between 2000 and 2010, 87 percent of manufacturing job losses were due to automation and 13 percent were the result of globalization and trade agreements.

NCCI’s Quarterly Economics Briefing notes that overall private employment growth in the United States slowed to 1.9 percent in 2016 after increasing to 2.3 percent in 2015. More than 2.2 million workers were added to U.S. private employer payrolls in 2016, the report states. The report also cites a Moody’s forecast showing that growth in employment across all industries in the U.S. will be around 1.8 percent in 2017 and 1.6 percent in 2018.