September 13, 2013

Are Manufacturing Jobs the Solution to Income Inequality?

September 13, 2013

Are Manufacturing Jobs the Solution to Income Inequality?

Manufacturing Jobs

A topic of discussion lately has been income inequality. The United States has aspired to be a country with a well-off middle class. Something has gone wrong. What has happened is that jobs are migrating away from the center. High-paying and low-paying jobs have increased in numbers while middle class jobs, based to a significant part on manufacturing, have decreased. The effect is that people who in the past may have gotten a manufacturing job may now be working at McDonald’s or Wal-Mart. One response has been to mandate a higher minimum wage with the thought that this would somehow improve the economy.

I do not believe that paying people who work at McDonalds or Wal-Mart $2 more an hour is the best solution. I think that we need to take an overview of jobs and especially manufacturing jobs.

From 2010-2012 there was an increase in manufacturing jobs. That increase has stalled in the past year.

The idea offered here is that a way to restore income equality and increase the health of the U.S. economy in general is to significantly increase U.S. manufacturing jobs.

A manufacturing job is a job with a manufacturing company. If you are a bookkeeper, a janitor or an IT person for a manufacturing company then your job is defined as a manufacturing job. Manufacturing industries and jobs are defined by the North American Industry Classification System (NAICS) a standard used by Federal statistical agencies in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy.

Manufacturing jobs are important because they have a large jobs multiplier.  According to Paul Jacobs, chairman and CEO of Qualcomm each new manufacturing job creates an additional 4.6 support jobs. In high-tech manufacturing this multiplier is as high as 16.

Domestic manufacturing jobs now are much more tech-based than those of, say, 1960 or even 1980. In 2012 94,000 people working in the steelmaking industry produced 14% more steel than nearly 400,000 workers did in 1980. As manufacturing jobs have become tech-based it has become evident that there is an underlying failure of our society and our education system. We simply are not educating enough engineers or other people with tech skills to perform these jobs. Only 7.1% of Bachelor’s Degrees in the U.S go to engineering majors. Internationally the number is 18.4%. A remarkable thing about the state of education is that the cost has increased dramatically at a time when one of the desired results of an education – getting a good job – has become less frequent.

Here it is important to note that the same rules may not apply to the demand for items manufactured domestically and to items imported. Domestic items may, in the future, be driven by limits to demand. People are less likely to purchase a new tech-intense item if it is not a considerable improvement on what they have presently. The same this is not necessarily true of imported items. Women’s shoes are an obvious example. There needs to be a significant enough increase in the perceived value of, say, a new smartphone compared to what the potential buyer already has to warrant purchase of a tech device. In a sense the question is this: do I replace my smartphone every 2 years or every 10 years?

For lower tech, imported items the cost of labor is still important. The difference in labor cost between China and the U.S. is not nearly as large as it once was. More importantly, labor in the U.S. is more productive at least for higher-end goods. High-end goods need skilled workers, precision assembly, and sophisticated technology. This makes American workers about three times more productive (GDP/hour) than Chinese workers.

From WSJ of 8/29/2013: “We are on a long-term adjustment, as China, in particular, but all developing countries, get their wages closer to ours,” said Richard Freeman, an economist at Harvard University. According to Boston Consulting Group, there will be only a roughly 10% cost difference between the U.S. and China in making products such as machinery, furniture and plastics by 2015.”

There are other issues as well. As the dollar gains strength, exports become more expensive and less manufactured goods will be exported meaning fewer jobs. The Fed’s low interest rates are keeping low the cost of capital which helps create manufacturing jobs here.

The difference between the domestic manufacturing jobs of the past and those of the future is likely to be that the manufacturing jobs of the future may be more diffuse. More people will not be making cars, tires and steel but instead making goods which perhaps do not yet exist. The somewhat unnerving problem is that we are not sure exactly what the manufacturing jobs of the future will be manufacturing.

The manufacturing jobs of the future will require a much different skill set than the manufacturing jobs of the past. Less muscle will be required, but more jobs will require computer skills. One thing this will likely mean is a larger percentage of women in manufacturing in the future.

The Unites States will probably never be able to be cost competitive with Asian nations when it comes to non-tech, labor intensive products such as clothing. The United States should be able to compete by manufacturing innovative products. I think that there are a couple of problems we have here. One is that the financial service industry (banking) has perversely taken a dislike for manufacturing because it simply does not like the risks and instead has sought profits from things such as high-frequency trading and derivatives. Banks need to reconnect with manufacturing. The government needs to expedite manufacturing by recognizing that if regulations delay the construction of plants here, then they will be built elsewhere and the jobs will be elsewhere.

The Manufacturing Institute says:

– 82% of manufacturers report a moderate or serious shortage in skilled production workers.

– 75% of manufacturers say the skill shortage has negatively impacted their ability to expand.

– 600,000 jobs in manufacturing are unfilled today because employers can’t find workers with the right skills.

Apart from manufacturing there has been a decline in middle class jobs in teaching and construction. Teaching jobs are declining because the birth rate slowed and consequently there are fewer kids to teach. Construction jobs plummeted because bad policies encouraged overbuilding of homes before the Great Recession. Home building is still at about two-thirds of its natural level.

Another point is that manufacturing can be growing without creating more manufacturing jobs. It can do this simply by becoming more efficient. In this sense, technical improvements in manufacturing are more likely to result in higher worker productivity (GDP/hour worked) than in the creation of more jobs.

Workers today produce twice as much manufacturing output as their counterparts did in the early 1990s, and three times as much as in the early 1980s, thanks to innovation and advances in technology that have made today’s workers the most productive in history.

We need to do three things to help manufacturing jobs: 1) better educate people for these jobs 2) reconnect the banking and investment banking systems with manufacturers and 3) minimize job-preventing government regulation. These three things will not, on their own, restore manufacturing jobs. New manufacturing jobs will be created by entrepreneurs with new ideas and the support of these three things.

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