employment

Have rising labor costs doomed wood products in the United States?

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by Brent Sohngen (Sohngen.1@osu.edu)

This article goes into more detail about the economic factors driving outcomes in the forest sector, and in particular, the pulp and paper industry in North America. As with my last post, this piece considers the case of a pulp and paper mill that is soon to shutter in Chillicothe, Ohio. The scenario there, while in many ways unique because of the types of paper the mill produced, also shares many traits with what is happening more broadly in the wood processing sector.

I imagine it is never an easy decision to shut down a factory. Politicians often make it out to be the nefarious work of owners bent on squeezing everything they can out of workers, local communities, and suppliers before escaping in the middle of the night, their pockets lined with millions, or billions, in profits. But it’s never that simple.

When a factory closes, costs decline, but so do revenues. Capital is left behind, along with the good will of a community and well-trained employees. Usually for clear economic reasons, owners conclude that continued investments in the factory will not payoff. In some cases, closing may result from rising input costs, while in other cases it may happen when the products the factory makes are no longer demanded.

Such appears to be the case in Chillicothe, Ohio, where Pixelle Specialty Solution is shutting a large, long-established, pulp and paper mill. This mill produced carbonless paper and other specialty products. The carbonless paper market has been declining as an increasing share of transactions go online. Pixelle moved other product lines from this plant to other plants they own.

Why not repurpose the mill for other products? Ohio has a decent stock of trees, but growth has been slowing as its forests age. Trees are mostly mixed hardwoods, which can be fine for certain types of pulp, but pulpwood is most economically obtained from clear cuts, especially those in wood plantations where uniformity lowers costs. Larger trees make their way into 2x4s while smaller trees and tree parts are shifted to pulp and similar lower value uses. Profits are made on the larger trees.

Clear cuts are not super common in Ohio where owners prefer selection cuts. If they cut anything, just the largest, most valuable trees are taken, with smaller ones, tops, and branches often left behind. Without care, and good forestry, this approach may lead to high grading, which contributes to slower forest growth rates. Ohio does not have a strong timber growing and harvesting base in comparison to other regions in the US and the world, so any new mill would need to import pulp.

Pulp imports could come from other parts of the United States. The US has long had an advantage when it comes to trees. In the second half of the twentieth century, old growth forests in the Pacific Northwest provided a key strategic asset, followed by second, third, and fourth generation pine plantations in the Southern US.

Pine in the US grows plenty fast, but the US growth advantage has eroded over the years as industrious foresters have figured out how to grow eucalyptus and pine plantations faster  in Brazil. Yes, rainforest is falling to make way for cattle and soybeans, but the Brazilian wood products industry has planted over 10 million hectares of fast-growing non-indigenous species on old farmland and savannas to feed its iron (heat from charcoal) and wood product industries.

Because wood pulp is easily transported, it can be made cheaply in Brazil and shipped to the United States or China. Not surprisingly, Brazil is now one of the world’s largest exporters, and their exports are growing (Figure 1).

Figure 1: Pulp exports from the US and Brazil (UN Food and Agricultural Organization, FAOSTAT database).

For US paper companies, it’s a big hurdle to overcome the substantial boost that lower labor and energy costs provide in Brazil, alongside ultra-fast forest growth rates. Even if energy costs can be driven down here, US companies will still have a tough time competing in this global market because of trends in labor costs.

A recent report by BTG-Pactual finds that the key problem holding US paper manufacturers back is the high cost of producing pulp. Their analysis illustrates that pulp costs are roughly 40% higher in the United States than in Latin America.

Figure 2 illustrates US cost trends for five inputs used to produce paper: trees (timber price), manufacturing wages, interest on bonds, electricity, and natural gas. From 2000 to the present, wages and electricity prices increased, while natural gas, interest rates and timber input prices declined.

Although many costs trended downward this century, since 2020, costs of most inputs have risen. This most recent trend weighs heavily on wood product manufacturers in the US.

Figure 2: Input and output price trends. Data sources: Timber prices from Timber-Mart South; Wages, AAA bonds, and pulp, paper and allied product prices from St. Louis Federal Reserve; Electricity and natural gas prices from Energy Information Administration.

 

High costs for labor – a key problem facing paper manufacturing in the United States – is not an unfamiliar story for most industries.  With high labor costs, companies must rely on technological or other advantages to maintain a competitive advantage.

Today, there is talk of using tariffs to compensate for this competitive disadvantage, however, imposing tariffs is a bit like swimming upstream. Even if tariffs help to keep pulp and paper mills afloat for a few years longer, only lower wages (or higher wages in the competing country) or better technology with fewer labor inputs will resolve the competitive disadvantages in the long run. There is a risk with tariffs too. They raise prices and increase the pace of substitution

Big new investments in US pulp and paper, or forest industries more generally, will only be made when longer term prospects turn positive. One of those “positives” is the price of paper material, which has increased in the last couple decades, almost in lock step with wages (Figure 2).

These rising prices reflect declining capacity in the United States and Europe over the last 5 – 10 years combined with growing demand for shipping containers and boxes. This demand increase was global in nature, with rising economic growth and trade across the globe in the twenty-first century. The movement to e-commerce also elevated demand for boxes.

Undoubtedly, these demand factors have kept some factories in the US open longer than otherwise. For the last decade or so, businesses have been able to compensate for higher wages with better prices. Eventually, however, the strong uptick in several costs proved terminal for factories like the one in Chillicothe.

One thing the US has going for it is its land-base, which is capable of producing well over 500 million m3 of timber sustainably each year – a number 40% greater than we currently produce. With rising competition from Brazil and other places with potential for fast-growing forests, moving to this level of wood harvesting in the US will require both new demand and new investments in technology and people. These investments will have to happen both in forests and factories.

Could we see movement to this level of harvesting and investment in the US?   I’ll turn to that question in the next post.

What Drives Employment in Forestry and Wood Processing?

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Brent Sohngen (Professor, AED Economics, Ohio State University, Sohngen.1@osu.edu)

After 200 years, paper-making in Chillicothe, Ohio will end in August 2025 when Pixelle closes a mill there. Like so many other places, Chillicothe is losing a business that has been part of the community for generations. This eventuality could have happened 20 years ago when the Dayton-based Mead Corporation merged with Westvaco. The combined company later sold the plant to a private equity firm. Yet, the plant hung on, even as it changed hands a couple times before landing with Pixelle Specialty Solutions in 2018.

Now apparently, it really is at its end, and with it 800 jobs.  I’m sure the Ingham brothers, whose ingenuity at using water power to mechanically create pulp in the early 1800s, and Colonel Daniel Mead, whose name adorned the plant for over a century, never imagined their legacies would last so long, but the companies they created certainly stood up to the test of time.

Unfortunately, legacies like this are falling all over the US and the world. Pulp mills are increasingly going extinct. And it’s not just mills working with virgin material from the forest. Greif Industries is eliminating capacity in the recycling sector. Something is going on out there in the forest economy, and small towns like Chillicothe are in the cross hairs.

One has to ask whether this is the start of a new downward spiral in wood harvesting and employment in the United States, similar to what happened from the late 1990s to 2010 (Figure 1), or whether it is a temporary blip.  After all, US employment in wood processing stabilized after 2010 and even grew a bit.

Figure 1: US employment in wood and paper manufacturing (NAIC Codes 321 and 322). Data from the Bureau of Labor Statistics (data.bls.gov).

So what are the drivers of  employment in this sector? Aside from demand and technology, three key supply side components play an important role: access to raw material, access to workers, and access to energy.

Let’s start with access to raw materials – namely trees. Figure 2 presents total harvests and the inventory of harvestable tree volume in the United States since the early part of the last century. Wood harvesting generally increased, with big dips during the Great Depression (1931-32) and the Great Recession (2006-08).

Figure 2: US Timber Production and US Timber Volume. Authors calculations from various sources.

The slowdown in harvesting early in the twentieth century, from 1905 into the 1920s, happened because wood supply was lacking (too young or too remote) and because labor became scarce. Wood resources in the populated eastern US had been depleted by over a century of relentless westward movement, and while forests were regrowing on abandoned agricultural land, it would take time for stocks to build. Though big trees were plentiful in the west, they were costly to access in the early 1900s because the necessary infrastructure was not yet built.

Costs were further increased by labor constraints when World War I broke out and many young laborers were sent to war. As a a result, employment in wood products, including pulp and paper, fell from more than 1 million people in 1914 to 890,000 in 1921 (US Census of Manufacturers, 1930).

After 1990, the downward trend in harvesting happened for different reasons: forest preservation and demand contraction. Starting in 1990, 15% of the nation’s timber supply was lost when harvesting ceased on National Forests due to administrative fiat. Employment in wood processing fell in regions most heavily affected by these forest set-asides – including Oregon, Washington, California, and other western states. The resulting dip in employment can be seen in the national data (Figure 1).

However, even bigger economic changes were underway. Demand for paper began to feel the pinch as society moved online. In 2006, housing markets faltered because of rising interest rates, and by 2008, the bottom fell out when Lehman Brothers went bankrupt and the stock market cratered. A crippled economy caused housing starts and wood demand to plummet. Employment in wood processing, and especially pulp processing, fell.

No doubt, access to trees affects employment – just witness what happened in the eastern US at the beginning of the twentieth century and the Pacific Northwestern US at the end of it – but tree supply is not a problem today. Trees are literally everywhere. Even as harvesting expanded in the US, timber inventories grew across the last century (Figure 2).

What’s most surprising about the last century is that the U.S. experienced a massive run-up in wood harvesting from the 1930s through the 1990s and wood inventories increased! How is that possible?

The answer lies in plantations, and the many investments forest companies made in improving the growth of trees.  Now, over 16 million hectares (40 million acres) of fast-growing plantations have been established in the US, especially in the South where tree growth is fastest (Figure 3). Not coincidentally, this region is home to many of the largest, most technologically advanced lumber and pulp mills in the world, which located there to be close to the trees.

Despite a surfeit of trees, and falling wood prices (Figure 4), wood processing mills are closing all over the US these days, including the South. It turns out that access to trees isn’t everything in the wood processing sector. Employment today is more dependent on labor costs, labor skills, interest rates, technology, and consumption patterns.

Figure 3: US forest growth by state. Authors calculations derived from US Forest Service Forest Inventory and Analysis database (https://research.fs.usda.gov/programs/fia).

 

Figure 4: US South stumpage prices. Authors calculations from (Haynes, 2008) and Timber-Mart South (https://timbermart-south.com/).

 

The US has proven itself to be competitive in growing trees. For a long time, this competitive advantage translated into strong growth in the wood products sector, especially in the US South, but also in other regions. Yet the competitive advantage seems to now be eroding. Unlike last century, when limitations in the supply of trees created bottlenecks, today the primary factors affecting employment in wood processing have largely to do with pressures external to the forestry sector.

Beyond the forestry sector, this shift creates a dilemma for the environment. Southern forests have become the powerhouse of US forest carbon sequestration because demand has encouraged investments in fast-growing forests. If wood prices keep falling in real terms, it is hard to see how this level of investment remains profitable.

In recent years, the US has become the supplier of choice for wood pellets used to generate renewable electricity in Europe. Although this market has grown, stumpage prices in the South have continued their downward march. Deeper investments in pellet-based boilers and the emerging mass-timber sector could reverse this price trend (see Favero et al., 2023; Lan et al., 2025), but investments in capacity for mass timber and wood-based biomass energy have not been strong enough to date to switch the current price trend.

So what does this mean for a  place like Chillicothe, Ohio, which hung onto its pulp mill for over 200 years even as America’s wood basket moved south and west in the 1900s? Raw materials can be shipped into the region, so the factors that are going to drive new investments are labor force, energy, and regulation. In this environment, it turns out that the real competition for wood products manufacturing isn’t even other wood processing facilities, but companies in the rest of the economy that are competing for the same set of workers.

 

References

Favero, A., Daigneault, A., Sohngen, B., Baker, J., 2023. A system-wide assessment of forest biomass production, markets, and carbon. GCB Bioenergy 15, 154–165.

Haynes, R.W., 2008. Emergent lessons from a century of experience with Pacific Northwest timber markets, General Technical Report. US Department of Agriculture, Forest Service, Pacific Northwest Research Station, Portland.

Lan, K., Favero, A., Yao, Y., Mendelsohn, R.O., Wang, H.S.-H., 2025. Global land and carbon consequences of mass timber products. Nat. Commun. 16, 1–12.