Manufacturing Jobs

Can We Salvage Them?

President Trump, campaigning in 2016, proposed to strengthen the American economy and labor market by reviving the manufacturing sector. ‘Made in America’ was one of the slogans that got him elected. It is logical for any American to wonder why manufacturing is so important to a nation’s economy — and — if it is so crucial, what has caused its decline? Is it a fact that the sector has declined or is it just a populist theory? Can we attain and sustain higher economic growth by boosting this sector?

Why is the Manufacturing Sector Important for the Economy?

Production Begets Power

Mechanical production began with the industrial revolution in the late eighteenth century. Goods that were previously hand-made were produced by machines. This milestone in history not only brought about a paradigm shift in international trade, it also altered the power balance among countries of the world. Nations that had mechanized means of production and continued to make these means technologically superior to others, became powerful — thus came the era of Super Powers.

However, in the wake of globalization, the rules of the game substantially changed. No longer bound by geography, many companies moved their production elsewhere to lower costs, leading to the emergence of new economic super powers. The rise of modern China as the world’s second largest economy with its huge productive capacity, within a span of a mere 50 years is the best example.

Manufactured goods are necessary for trade

According to the World Trade Organization (WTO), approximately 80% of international trade is in goods, and only the remaining 20% or so is in services. The statistics are quite the same for the US. This means that we need goods to trade for foreign goods or else we end up widening the gap between our imports and exports — the trade deficit. To make available the required currency for our import needs, we sell assets. In this process, we make our dollar cheaper — which makes the same imports more expensive.

Manufactured goods are crucial for the service industries

More than 80% of the labor force is employed by the Services Industry. Such services are dependent on manufactured goods for their operation and for their technological improvement. For instance, the airline industry, the telecommunications industry, the software industry depend on airplanes, phones, semi conductors/computers respectively for their existence and innovation.

Employment by the Manufacturing Sector

Manufacturing hired only 13% of the US workforce. However, it is important to underscore here that manufacturing employs a higher share of workers in rural America and also those without a college degree (67%) than the economy overall. According to the Rural America at a Glance 2016 published by the United States Department of Agriculture (USDA), employment in 17.8 percent of rural counties with 22.5 percent of the rural population is manufacturing dependent.

The Current Status of US Manufacturing

The United States is the world’s second largest manufacturer, with an industrial output of approximately $2.18 trillion in 2016, a record level. Real output (i.e., adjusted for inflation) was at $1.92 trillion.

During 2016, the US exported $1,051 billion in manufactured goods and imported $1,920 billion.

An analysis of the labor statistics (2015) shows that manufacturing jobs account for 13% of the total employment in the US. In 1998, the comparative percentage stood at 15%. The charts here depicts the current size of this industry and the trend since the last decade. While the GDP from the sector is increasing in absolute terms ($ billions), the share of this sector of total GDP has been continuously declining.

Manufacturing — Declining or Growing?

Does a lower share of overall GDP mean that the manufacturing industry is producing less? Or, are there other factors at play resulting in the decline in employment in this sector? In fact, the manufacturing sector has become more productive, while giving fewer people jobs i.e. more output but less employment. [Productivity is measured as output per hour and hence is a function of efficiency contributed by employees, equipment and processes.]

The output of the US manufacturing sector is now higher than it has ever been. However, that is not true about the employment by this sector. The diverging lines in the graph reflect improved productivity. America is producing but the labor is increasingly contributed by automation. Boston Consulting Group reported that it costs barely $8 an hour to use a robot for spot welding in the auto industry, compared to $25 for a worker. In 1980 it took 25 jobs to generate $1 million in manufacturing output, while in the recent times, it takes only five jobs. The loss of manufacturing jobs has as much to do with the automated, hyper-efficient shop floors of modern factoring and not necessarily outsourcing.

Is this alarming trend unique for the US?

The decline in manufacturing’s share of US GDP over the last forty years is nearly identical to the decline in world manufacturing as a share of world GDP, which fell from 26.6 % in 1970 to 16.2% in 2010. It is only reasonable to conclude that the declining share of manufacturing’s contribution to GDP reflects a global trend as the world moves from a traditional manufacturing-intensive “Machine Age” economy to more a services-intensive “Information Age” economy. , making technology the culprit for the loss in jobs.

Who is the Culprit?

Automation — as explained above, is considered to be the main reason for loss of manufacturing jobs. The alternative theory is that trade — which is tied to outsourcing — is the culprit. The graph here depicts US manufacturing employment against our growing manufacturing deficit.

Between 2000 and 2007, 2.6 million manufacturing jobs were lost. When the Great Recession hit and consumer demand declined across the globe -domestic and foreign — additional 2.3 million manufacturing jobs were lost, of which only 900,000 has been regained post recession. Many economists attribute these losses to skyrocketing trade deficits as a result of growing imports from China and other currency manipulators since 2009. The manufacturing trade deficit grew from $319.5 billion in 2009 to $514.6 billion in 2014. In economic terms, trade deficits mirror negative capital inflows into the economy through imports in excess of exports. Trade deficits lead to higher interest rates which in turn lower economic activity and thereby cause loss of employment.

Over the past two decades, currency manipulation by about 20 countries, led by China, has inflated U.S. trade deficits. Tariffs, on goods from such countries, are the most common mechanism employed to curb currency manipulation. Tariffs would make it difficult for such countries to sell their goods as they become expensive now. However, tariffs will not make our goods less expensive in those countries. Economists suggest that unless the government devices legislative tools and tailor our foreign policy to tackle such currency manipulators, the problem will continue to exist and will manifest as higher trade deficits.

Is There Reason To Panic?

Many economists consider that manufacturing is going the agriculture way. In the early twentieth century, more than 40% of all jobs were agriculture dependent. In 2016, it accounts for a mere 1% of the labor market. In terms of output, the US is the third largest agricultural economy, and the largest food exporter in the world. United States has continued to be a superpower in the food market. Despite the recession and China’s surge in manufacturing, US is the largest manufacturing economy in the world, in terms of absolute output.

All the same, the Service sector is surging ahead. Currently it provides 80% of the total employment in the nation. Service sector comprises a broad swath of industries including utilities, wholesale and retail trade, transportation, information, financial facilities and services, educational services, hospitality, health care and government services.

According to a research by Institute for Economic Education at ETBU (East Texas Baptist University), manufacturing jobs peaked in 1979. Since then, US lost more than 7 million jobs, most during the recession years of 2008 and 2009. However, during the same period (1979–2014), we have made up for the job losses by a net gain of 53 million non-factory jobs/services. Since 2000, the service sector has been hiring more than 10 times the manufacturing sector.

The shift to a skill intensive service economy has also resulted in enhancing the educational attainment of the workforce in general. The entry level educational requirements are higher for the service industry in contrast to the manufacturing sector. A research conducted by Georgetown University in 2015 highlights that the transition from a manufacturing to a service economy led to the parallel shift from a high school to a college economy. Further, 62% of non-factory jobs pay equal or higher way in comparison to the manufacturing jobs.

Can We Turn It Around?

President Trump has introduced a Corporate Tax Reform plan that aims to make it more attractive to locate factories in the U.S. by eliminating tax-based financial incentives for companies that move production to lower-tax countries, thereby increasing domestic production. It also proposes to allow US companies to subtract labor costs, which again should boost employment because labor is now less expensive. Even with the presumed increase in number of manufacturing units in the country, as proposed through tax reforms, how do we plan to counter the effects of technology and ever growing productivity on manufacturing jobs? Do we intend to stall our productivity and stagnate innovation to keep our jobs?

In fact, innovation could be the only possible way to keep manufacturing ticking. For example, Apple out-sources most of its manufacturing outside the US, but most of the design and marketing is done there. US’s comparative advantage as far as manufacturing is considered is its cutting edge means of production that demands high levels of skill and engineering, for which innovation is key.

The other way we can turn this trend around, is by closing the skill gap. According to an annual survey carried out from 2009 through 2014, by Deloitte Consulting and Manufacturing Institute, an estimated 600,000 manufacturing jobs went unfilled in the United States in 2011. Manufacturers could not find enough workers literate in the science, technology, engineering, and math (STEM) disciplines necessary to effectively function in advanced manufacturing environments. It is estimated that this number would grow to over 3.4 million during the next decade, as 2.7 million workers retire and modest economic expansion creates the need for an additional 700,000 workers. The labor forecast is that manufacturers will be able to fill fewer than half of these job openings due to the skills shortage.

To President Obama’s question to Steve Jobs during a state dinner in 2011, as to why Apple’s outsourced work can’t come home, Jobs replied that Apple executives and many others believe there simply aren’t enough US workers with the skills the company needs or the factories with sufficient speed and flexibility.

There are serious hurdles in obtaining higher levels of education — most crucial being rising tuition costs. Attainment of a degree has become more of a financial burden than furtherance of learning. Employers/companies need to pitch in significantly on this and provide appropriate and continuous avenues of professional development for their employees. Training and Development needs to be high on their agenda if companies intend to keep productivity and profits climbing and employee turnover low.

Also, there are other sectors that job aspirants could focus on and plan for. The construction industry is projected to have the largest industry increase in employment during the period 2014–2024. Green jobs too are on the rise. Sustainability sector in the US employs roughly 4.5 million people, a significant increase from 3.4 million jobs in 2011. The renewable energy sector is creating jobs at a rate 12 times faster than that of the rest of the U.S. economy, according to a new report published by Environmental Defense Fund. Though agriculture has been hiring less and less over the last few decades, agri-businesses and agro-tech industries are growing significantly. Needless to mention that demand for food is at an all time high.