A manufacturing exodus from Nordic economies could lead to the loss of more than 200,000 jobs in the next five to seven years as investment continues to shift from developed markets to emerging ones, according to the Boston Consulting Group.
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Denmark, Finland, Norway and Sweden have been experiencing an erosion of manufacturing over the last decade, and BCG warns of continued declines if the region, which hosts some of the world's highest labor wages, fails to enact new policies designed to keep labor costs in check and manufacturing competitive.
Nordic economies have already lost a combined 1 million production jobs -- a decline of 40% -- since 1980. BCG says another 200,000 could be at risk through 2020.
“Manufacturing has historically been a critical driver of economic growth, employment, and healthy trade balances in the Nordic economies,” BCG partner Andreas Alsen said, adding that “urgent policy action” is needed to keep the region’s sector intact.
Among the most affected are young workers seeking jobs in key Nordic industries, including electronics, machinery, wood, products and transportation equipment. BCG says service industries would also suffer due to their tie to manufacturing.
To blame are steep labor costs compared with other emerging markets like China – a trend that has pushed investing to emerging markets from developed ones over the last two decades. High wages were also among the catalysts that pushed U.S. manufacturers overseas late last century, eroding the “Made in America” brand that has only recently started to rebound.
In an earlier report out of Denmark and Sweden, average manufacturing labor costs were found to be 80% to 90% higher than in China and Eastern Europe, and that’s despite rapid increases in emerging-market wages.
Labor costs were even higher compared with developed rivals, including Germany and the U.S. by as much as 20% and 40%, respectively, the national study found.
“Because Nordic wages are also projected to keep rising for the rest of this decade, the cost gap with emerging markets in unlikely to shrink enough to improve the region’s competitiveness in the near term,” said Ian Colotla, who leads BCG’s operations practice in Denmark.
The Nordic economies struggle with strict labor rules, which have put them in some of the world’s worst rankings in terms of flexibility in setting wages and hiring and firing practices. Due to a host of other factors, it enables an aging workforce to hold on to their jobs for longer than would otherwise be dictated by the market, shutting out cost effective youth workers.
With the market becoming exceedingly expensive and unfavorable for manufacturers, companies are being incentivized to relocate to more attractive regions in Asia.
“Many companies, particularly small and midsize enterprises, avoid new permanent hiring unless absolutely necessary," said Borge Kristoffersen, a BCG partner based in Oslo, Norway's capital and economic hub. “Instead, they are hiring offshore.”
Of course, there is still room for considerable improvement despite the expensive handicap; and it helps that each of the four Nordic economies ranks among the top 15 nations in the World Economic Forum’s Global Competitiveness Index.
Each also score among the highest in the world for education quality, political stability and ease of doing business, while spending some of the most in the world on research and development as a percentage of GDP.
BCG urges Denmark, Finland, Norway and Sweden to consider enacting a “New Deal” type of policy to encourage manufacturing activity, while keeping corporate tax rates low and wage increases closer to those offered by rival nations.