24 January 2012

Understanding American Manufacturing

Writing in the current issue of The Atlantic, Adam Davidson has an absolutely brilliant article on the state of American manufacturing. It is a lengthy article that you should read in full. The article clearly explains why it is that manufacturing jobs are going away, even as the manufacturing sector strengthens. It also explores the challenges facing so-called unskilled workers in a big, rich 21st century economy. The article does this by looking at real people in a real factory.

Here is an excerpt from the piece:
Is there a crisis in manufacturing in America? Looking just at the dollar value of manufacturing output, the answer seems to be an emphatic no. Domestic manufacturers make and sell more goods than ever before. Their success has been grounded in incredible increases in productivity, which is a positive way of saying that factories produce more with fewer workers.

Productivity, in and of itself, is a remarkably good thing. Only through productivity growth can the average quality of human life improve. Because of higher agricultural productivity, we don’t all have to work in the fields to make enough food to eat. Because of higher industrial productivity, few of us need to work in factories to make the products we use. In theory, productivity growth should help nearly everyone in a society. When one person can grow as much food or make as many car parts as 100 used to, prices should fall, which gives everyone in that society more purchasing power; we all become a little richer. In the economic models, the benefits of productivity growth should not go just to the rich owners of capital. As workers become more productive, they should be able to demand higher salaries.

Throughout much of the 20th century, simultaneous technological improvements in both agriculture and industry happened to create conditions that were favorable for people with less skill. The development of mass production allowed low-skilled farmers to move to the city, get a job in a factory, and produce remarkably high output. Typically, these workers made more money than they ever had on the farm, and eventually, some of their children were able to get enough education to find less-dreary work. In that period of dramatic change, it was the highly skilled craftsperson who was more likely to suffer a permanent loss of wealth. Economists speak of the middle part of the 20th century as the “Great Compression,” the time when the income of the unskilled came closest to the income of the skilled.

The double shock we’re experiencing now—globalization and computer-aided industrial productivity—happens to have the opposite impact: income inequality is growing, as the rewards for being skilled grow and the opportunities for unskilled Americans diminish.
Looking for significant job growth in a sector that is in the midst of experiencing a revolution in productivity gains is just bad math.

Edward Alden, writing at the new CFR blog, Renewing America, points to business services where future job growth has significant prospects:
[E]ven as the manufacturing sector will continue to grow, the United States will need to look to other industries for robust, higher-wage job growth. My bet is on the business services sector, in fields such as engineering services, movie and software production, and telecommunications where demand for U.S. services is growing rapidly, especially in the emerging markets. Brad Jensen of Georgetown University and the Peterson Institute has laid out the case in his excellent new book. These sectors already employ twice as many people at higher average wages than in manufacturing, and job growth has been strong over the past decade. The United States runs a steadily rising trade surplus in services, compared with a deep, chronic deficit in manufacturing trade. These are sectors in which the United States, along with Europe, has a strong comparative advantage and the potential to sell much more to the world.

No one sector is going to dig the United States out of the jobs hole we currently find ourselves. But manufacturing is a particularly poor candidate.
With an estimated 40 million unskilled workers (according to Davidson in The Atlantic) the US has a big challenge ahead.