Doing More With Fewer Jobs.
by Alan S. Brown
Manufacturing jobs have declined even as total U.S. employment has risen. The trend is especially noticeable after the 2001 recession. Ordinarily, companies downsize and layoff workers in recessions, then hire them back when business picks up.
As Kristin Forbes, a member of the President’s Council of Economic Advisors, reported in a paper published in 2004, the drop in manufacturing jobs following the 2001 recession through 2003 was the steepest decline since 1960. Instead of bouncing back, however, manufacturing has lost an additional 625,000 jobs. Forbes said both short-term and long-term trends were to blame.
Short-term, she argued, businesses over-invested during the dot.com boom and delayed new spending longer than usual afterward. Manufacturers were also hurt by lower exports to trading partners, whose economies had also slowed.
Long-term, she noted that productivity growth enables manufacturers to produce more products with less labor. Many economists point out that the acceleration of productivity starting in the 1990s coincides with the widespread availability of inexpensive PCs and easy-to-use manufacturing software. Today, even small shops can afford operations and manufacturing software that were once the exclusive domain of their larger competitors.
David Huether, chief economist for the National Association of Manufacturers, has seen many examples of these changes. “I once toured an apple sauce manufacturer that used to slice the apples by hand before sending them to a grinder,” he recalled. “Now they use an automated system that replaces all those workers.”
He recalls a second company, a metal fabrication business in Baltimore. “It used to make wire hangers for battery displays,” Huether said. “That was a very low-value-added product that was vulnerable to foreign competition. Today they’ve added robots to make customized wire mesh baskets to transport parts in factories. Their output has grown exponentially, but they still employ only 30 people.”
Susan Houseman, a senior economist at the Upjohn Institute for Employment Research in Kalamazoo, Mich., argued in a 2007 working paper that outsourcing and offshore production have inflated productivity numbers over the past 15 years.
Labor productivity, she said, is calculated by dividing shipments (in constant dollars) by employee hours worked. “When manufacturers outsource or offshore work, labor productivity increases directly because the outsourced or offshored labor used to produce the product is no longer employed in the manufacturing sector, and hence is not counted in the denominator of the labor productivity equation,” she noted. She estimated that outsourcing and offshoring may have added as much as 0.5 percent to overall productivity growth in the 1990s.
Salaries of U.S. production workers have remained essentially flat since 1978 when the effects of inflation are removed by measuring wages in real (1982) dollars.
U.S. productivity growth generally tracked competitors before leaping ahead in the mid-1990s.
INTERNATIONAL ECONOMIES OF SCALE
Thirty years ago, economics textbooks uniformly noted that the United States had a key advantage in manufacturing. It had a large, uniform, and affluent internal market. Its manufacturers could achieve economies of scale by building mass production facilities that slashed cost to the bone just by serving that internal market. Other regions, particularly highly fragmented Europe or Japan, had to rely on international trade in order to achieve these same scale efficiencies.
That was then, this is now. Today, other nations build world-scale plants and rely on exports to achieve economies of scale. Moreover, the United States has become an active player in global trade, which includes imports plus exports. The nation is a net importer, with imports of merchandise rising about twice as fast as exports.
Yet U.S. trade volumes pale in comparison with Europe and Asia. According to the World Trade Organization, in 2006, Europe accounted for 48 percent of all trade in manufactured goods and Asia had 32 percent. Europe dominated automotive products with 54 percent of trade, while Asia had 55 percent of global trade in office and telecommunications equipment.
U.S. exports have risen significantly over the past four years. Most economists attribute this to the decline in the value of the dollar, which makes U.S. products relatively cheaper when purchased with foreign currencies. According to the U.S. International Trade Commission, exports of all merchandise rose 11 percent in 2006 to $1.8 trillion. Energy products, minerals and metals, and transportation equipment accounted for more than half the increase.
Or did it? According to project manager John Kitzmiller at the International Trade Commission, it is not always easy to put a precise value on imports and exports. Take transportation equipment, for example. In 2006, the United States had exports of $249 billion and imports of $310 billion. A good deal of it went in and out of Mexican maquiladoras, factories built by U.S. automakers and their suppliers to take advantage of low-cost labor.
“Take something that is imported as a kit, with all the pieces needed for assembly,” Kitzmiller explained. “It’s called a television receiver as far as customs is concerned, but it’s really everything you need to make a complete TV.
“There is an awful lot of production sharing, where we take components made somewhere else, build a subassembly, send it to Mexico, and it comes back with additional work. We make microprocessors here, do some work on them, then export them for encapsulation and other processes there.
“There is a lot of work in progress, where we’re adding value and someone else is adding value. Take a domestic motorcycle, for example. The tires might come from the U.K., the wheels from Australia, the brake rotors and calipers from Italy, and the carburetor from Japan. How much value is added by U.S. companies and how much by others? That’s hard to capture in trade statistics,” Kitzmiller said.
Europe dominates global trade in manufactured goods, but Asia is the leading exporter of office and telecommunications equipment.
U.S. exports show rises in transportation equipment, though some of that may be due to shipment of goods back and forth over the Mexican border for fabrication and then further assembly in the United States. U.S. imports of energy-related products have risen sharply, but so have electronics.
The United States remains a major exporter of aerospace products, semiconductors, motor vehicles, and medical products.
NEW COMPETITORS
The competitive landscape has changed greatly over the past 30 years. The United States, Western Europe, and Japan, the world’s dominant economic powers, are being challenged by China, Brazil, Russia, India, Korea, Mexico, Turkey, Indonesia, Taiwan, and even Iran, all of which have cracked the top-20 list of largest economies.
Ranking depends on how you measure the size of an economy. Because the United States is the world’s dominant economy, economists often measure gross domestic product in U.S. dollars. Based on that criterion, the United States at $13.8 trillion is the world’s largest economy, followed by Japan ($4.4 trillion), Germany ($3.3 trillion), and China ($3.3 trillion).
Another way to measure is by the purchasing power parity, a technique that determines the parity of two currencies based on what they can buy. The Economist popularized the notion with its Big Mac index, which lists the amount of local currency needed to buy the McDonald’s burger in different countries. Do this with a basket of goods and it provides a good measure of a nation’s standard of living—and the strength of its economy.
Based on purchasing power parity, the $13.8 trillion U.S. economy is followed by China (equivalent to $7.0 trillion), Japan ($4.3 trillion), and India ($3.0 trillion). Germany falls to fifth on the list ($2.8 trillion) because it is expensive to live and do business there.
Eight of the top 20 economies according to purchasing power parity are classified as developing nations (nine, if we count Russia, which is usually regarded as a special case). Purchasing power picks up the robust nature of these economies, even when those strengths do not translate directly into dollars.
When measured by dollars at going exchange rates, the U.S. economy is three times larger than the next largest economy, Japan. When measured by purchasing power parity —what a dollar buys in goods and services in another country regardless of the exchange rate—China suddenly becomes the world’s second largest economy at half the size of the United States.
Manufacturing is growing in both developed and developing nations.
The United States remains the world’s dominant manufacturer. After challenging in the early 1990s, Japan has faltered. China is gaining rapidly.
Click here to read the related story, “Strength in Numbers,” from the September issue of Mechanical Engineering magazine. | 
