The U.S. Inflation Reduction Act (IRA), along with the Chips and Science Act, was heralded as a game-changer for manufacturing jobs and climate action. However, a year later, the numbers tell a different story. An analysis by Niclas Poitiers, published on Bruegel, casts doubt on the Biden administration’s job creation claims. Moreover, these jobs make up only a small fraction of the total U.S. labor force and are overshadowed by average monthly job gains in the broader economy. The article also underscores that similar subsidy-driven approaches in Europe have yielded disappointing results in terms of job creation, despite hefty investments.
- The Capital-Intensive Nature of Clean-Tech and Semiconductors: The article points out that industries like chip and battery production are capital-intensive but require relatively few, highly-specialized workers. This is a crucial factor that policymakers must consider when projecting job growth in these sectors. The lack of large-scale job creation in these industries should not come as a surprise.
- Global Comparisons and the High Cost of Subsidies: The disappointing return on investment in terms of job creation is not unique to the U.S. For instance, an Intel factory in Germany is set to receive €10 billion in subsidies but will only create 3,000 manufacturing jobs. Similarly, a VW battery factory in Canada will get about €9 billion in subsidies for an expected 3,000 jobs. In both cases, the subsidy per new manufacturing job is staggering, at about €3 million.
- Beyond Job Creation: The Geopolitical and Environmental Imperatives: While job creation may be an overemphasized goal, there are other compelling reasons to invest in clean-tech and semiconductor manufacturing. China’s dominance in solar and battery supply chains is a concern, and the geopolitical importance of semiconductors justifies public investment. Additionally, in political climates where carbon pricing is difficult to implement, subsidies may be the only viable option to combat climate change.
- The Risk of Policy Failure and Unrealistic Expectations: Policymakers set themselves up for failure when they claim that industrial subsidies will lead to a manufacturing job boom. It’s also misleading to suggest that not offering generous subsidies would result in disastrous deindustrialization and job losses.
By taking a nuanced view, this analysis urges policymakers to be more realistic about what they aim to achieve with manufacturing subsidies. It also serves as a cautionary tale for governments contemplating similar policies, highlighting the need for a more balanced approach that considers the complexities of modern manufacturing sectors.
About the Author:
Niclas Poitiers, a German citizen, joined Bruegel as a research fellow in September 2019. His research interests span international trade, international macroeconomics, and the digital economy. Niclas is actively working on topics related to e-commerce in trade as well as European trade policy in the context of global trade wars. He also has a keen interest in issues surrounding income inequality and welfare state policies.