Labor is the most critical issue facing site selection decisions today. Even with national unemployment at a 17-year low, companies are regularly citing a “skills gap” in the U.S. economy—meaning there is a disconnect between skills companies are seeking and what skills are available in the labor market. Because of this, locations that offer available talent at affordable costs will have a competitive edge when attracting new industrial projects.

The availability of a qualified workforce is affecting industries across the country, but is most exemplified in the manufacturing industry. The Manufacturing Institute and Deloitte estimates that over the next decade, nearly 3.5 million manufacturing jobs will likely be needed, and two million are expected to go unfilled due to the skills gap. Eighty percent of manufacturers are currently reporting a shortage of qualified applicants for skilled jobs.

How do national manufacturing companies compete to find the skilled workers they need?

Economies of Agglomeration

Many manufacturers have found that locating operations near competitors and/or compatible industries helps ensure they can draw upon an available and qualified workforce.

This strategy helps minimize the risk of skill shortages, even if it means having to pay a premium for workers. By tapping into an experienced labor pool, companies locating in established clusters are often able to avoid the expense of basic training.

Economists call this clustering phenomena “economies of agglomeration”—where firms receive positive benefits from locating near like-industries without incurring a proportional added cost.

Workforce Development Programs

As labor pools tighten, wages increase and manufacturers are pressured to seek out alternative locations to mitigate costs. This creates an opportunity for low-cost locations, such as Southeastern states, to convince employers that skilled labor is available in their markets.

Originally, states like South Carolina, Georgia and Louisiana found it difficult to compete for new manufacturing jobs and investment during the first half of the 20th century. However, as wages rose elsewhere, and foreign competition intensified, U.S. manufacturers began eyeing cheaper markets.

However, these states remained an unproven destination, offering none of the benefits of co-locating with like industries, or any proof that its workforce had the requisite skills. Recognizing this shortcoming, Southeastern states implemented large-scale workforce development initiatives and industrial attraction strategies to successfully establish new industrial clusters.

Workforce development programs such as readySC, Georgia Quick Start, and Louisiana’s Fast Start offer customized training programs through local community college partners to regional students.

These programs effectively shifted much of the cost burden incurred to train lower-skilled workforces from the private to the public sector. As a result, companies have been able to lower operational costs, hire a capable workforce, and eliminate the associated costs of an offshoring alternative.

New Locations Emerge

While the workforce development programs have been a great success, “economies of agglomeration forces” have taken hold across much of the Southeast. The result has been gainful employment, rising wages, and an improved standard of living for many. Yet such success has also had the effect of increasing the costs of doing business in these areas—so much so, in fact, that the Bureau of Labor Statistics recently reported that median production wages in Louisiana, South Carolina, and Kentucky exceeded those of rival Midwestern states.

The shift in labor pricing is creating opportunities for new locations to emerge. Competing states have taken notice of the success of these training programs and are developing similar programs. An example of this can be found in Alabama, which leveraged its lower-cost labor market to attract a $1.6 billion investment from Toyota and Mazda. Among the incentives offered by the state to secure the 4,000-job project was a dedicated worker training facility.

Lucrative Manufacturing Market in the Midwest

Midwestern states, an afterthought for new manufacturing operations in recent decades, are becoming more attractive as Southeastern states lose their previously distinct cost advantage. In the aftermath of the most recent recession, pools of experienced industrial labor have become available in established Midwestern industrial clusters, presenting an opportunity for manufacturers seeking qualified talent.

For example, Illinois recently attracted a 1,000-job project from Rivian Automotive (a Michigan-based electric vehicle company) to reopen a former Mitsubishi plant which left behind a significant pool of qualified workers.

At BLS & Co., we have seen this trend among our own clients, most notably with a U.S. manufacturer considering moving an operation from the South to the Midwest in search of available industrial skill sets.

As labor markets continue to tighten, companies will be pressured to seek out alternative locations to find talent at reasonable costs. Identifying locations with the optimal balance of labor quality and cost will require companies (and their site selection consultants) to identify unique opportunities, such as recently closed facilities that could offer an immediate, cost-effective workforce.

No location decision is simple; all require complex analysis and the reconciliation of competing variables. Today’s skills gap and tight labor market intensify the challenge, while bringing potentially exciting opportunities for previously overlooked locations.