Michael Hicks: Manufacturing matters, but not for creating jobs


We are coming up on election season quickly, so it is again time to evaluate claims about economic policy. This isn’t a partisan process; candidates across the board tend to make claims that might trouble a close observer of the economy. I will focus on claims that might plausibly lead to counterproductive policies. I begin with the many claims about manufacturing, and its role in our economy.

Indiana is the most manufacturing-intensive state in the Union. This seems important, but we have fewer factory jobs and a smaller manufacturing GDP than California. Still, manufacturing is important here, and will remain important for the foreseeable future. But, the importance of manufacturing isn’t what most political leaders claim. It isn’t about jobs.

Manufacturing is important because it is the source of a significant share of regional productivity growth. It is also a source of patents and innovation, which leads to higher incomes. The best way to understand this is that wages in a nation are affected by overall productivity, not just productivity in one sector. By productivity I mean simply how much each worker produces each year. The United States has a very productive economy, with an extraordinarily productive manufacturing sector. This boosts wages for us all, but that isn’t the only effect.

Productivity growth in factories also means fewer factory workers. What took 1,000 workers in 1970 to produce can be done with fewer than 230 workers today. One result is that 2024 is likely to be the record year of factory production in U.S. history, in inflation-adjusted dollars. We’ll hit that milestone with near record low number of workers.

When I was a boy, factory jobs provided for a large, vibrant middle class. About one in three American workers toiled in factories and another third of jobs depended on the income of factory workers. Today fewer than one in 10 jobs depend upon manufacturing. The effect of manufacturing in local labor markets has never been more modest. It will be smaller still in 2030, even if manufacturing production remains strong, as I expect it will.

This is a happy story. American manufacturing, like American agriculture, employs very few workers because these industries are so very productive — each worker produces a lot of value. This comes from the use of machinery (or land and machinery in the case of farming). Improvements in productivity come from workers on the shop floor, but also from technology and innovation produced by universities and laboratories in businesses.

Part of the growth of productivity means outsourcing some of the work. The biggest source of factory outsourcing has been to other American businesses. About a third of the 4.5 million factory jobs lost since 1990 were simply a reclassification of workers from factories to professional services. These run the gamut from security services to robotics maintenance, illustrating why American manufacturing remains important.

Outsourcing also means sending the low-value production to less-productive countries. The average American factory worker today has two years of college experience, which means their education from kindergarten to the factory floor probably cost $300,000. We need workers like this to make expensive, high-tech items. The average Chinese or Vietnamese factory worker has a $15,000 education. We should unapologetically pay them to make the cheap stuff.

Maybe a third of lost factory jobs went overseas, a third disappeared due to robotics or automation and another third shifted to other American businesses. Again, this is a happy story about a thriving economic sector about which we should be very proud. But, that does not mean that factories will boost Indiana’s lagging regions. And that brings us to politics.

A surprising number of American politicians make the claim that factory employment will rescue lagging regions. The implicit promise is that manufacturing jobs will revitalize cities that have lost factory jobs over the past half century. These claims are irresponsible. Worse still, they show a deep lack of respect for voters. Even worse, a policy focus on manufacturing jobs weakens the long-term economic prospects of Indiana. This manifests itself in three ways.

First, a monolithic focus on factory jobs has resulted in a policy focus away from higher education. The result has been so damaging that Mississippi now sends almost a third more of its high school grads to college than Indiana sends. Yet, job creation in manufacturing is heaviest among Hoosiers who haven’t graduated from high school. We are in the midst of the first ‘de-skilling’ of the Indiana workforce in history. It is all driven by a wistful desire for more factory jobs.

Second, our focus on manufacturing jobs as an implicit political metric has been disastrous in terms of the mix of actual factory jobs. There’s a lot highfalutin talk about advanced manufacturing, but data on job growth by educational attainment since January 2000 is just stunningly bad. We’ve lost 7,852 factory jobs held by college graduates and 39,651 who have an associate degree or some college under their belt. We’ve lost a whopping 86,263 jobs for high school graduates. But, we’ve actually gained 2,428 jobs for high school drop outs.

It is worth restating that the only factory job growth Indiana has seen in 23 years is among high school dropouts. So, after almost a quarter century of focus on advanced manufacturing, and more than $10 billion in tax incentives, we have a less well-educated factory job force than we had in 2000. Advanced manufacturing jobs require a better, not less well-educated workforce. We have squandered that chance.

The third problem is the focus on manufacturing is actually backfiring on efforts to boost the Hoosier economy. By tailoring our K-12 educational sector to the training needs of a declining sector, we fail to prepare for emerging jobs. At the same time, the huge tax incentives to factories appear to be accelerating the automation of jobs. Of course, economists would expect this. By abating business personal property taxes, the cost of new equipment declines. This accelerates automation and reduces the demand for labor. We teach this in our 100-level economics classes.

It is worth noting these job losses occur in the very places we think we are trying to boost. And that is the real rub of our misplaced and myopic focus on factory jobs. There is some evidence Indiana’s manufacturing policies made factories more profitable, after all their taxes dropped from the 34th lowest to the 4th lowest in fifteen years. But, there is just no evidence the policies we pursue to boost manufacturing have helped Indiana’s lagging regions. Manufacturing is an important industry in our state for many, many reasons. But, creating jobs isn’t one of them.

Michael J. Hicks is the director of the Center for Business and Economic Research and the George and Frances Ball Distinguished Professor of Economics in the Miller College of Business at Ball State University. Send comments to [email protected].

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