There’s a common refrain among mainstream economists that, when it comes to America’s long-term growth, it doesn’t matter whether the country has a strong manufacturing base. Nor, they say, does having a healthy industrial structure create greater income equality. If we want growth and fairness, the thinking goes, we shouldn’t focus on specific industries. We should pursue broad policies, such as investment in education and progressive income taxation.
Earlier this week, former Council of Economic Advisers Chair Christina Romer argued that there was nothing special about manufacturing that would justify public policies aimed at supporting it.
But manufacturing is special. It’s more innovative and pays better wages than the rest of the U.S. economy. Those facts aren’t accidents of history. There are reasons behind them that are likely to persist for the foreseeable future. If we want more rapid economic growth and a more equal distribution of income, we can’t be indifferent to whether the United States has a healthy manufacturing sector.
Why Manufacturing is Different
Let’s start with innovation, which is the force that powers long-term improvements in our standard of living. Here, manufacturing strongly outperforms the rest of the U.S. economy. Manufacturers are responsible for more than two thirds of all company-performed domestic research and development spending, even though they only generate about 11 percent of America’s GDP. More than a third of all U.S. engineers work in manufacturing. And about 22 percent of all manufacturers introduced a new product or service between 2006 and 2008, compared to 8 percent of non-manufacturing firms.
Why is manufacturing more innovative compared to other businesses? The sector has long benefited from the relentless application of technical knowledge and skill. Every year, production workers, engineers, and managers find better ways to solve the technical problems of production. As a result, production becomes more efficient and, from time to time, the production process gets reorganized.
That recipe for innovation doesn’t work as well in the rest of the economy. In the service sector, only a few production processes, such as filling orders for fast-food meals or scheduling hospital patients, rely heavily on solving technical problems, often through the use of better information technology. But when it comes to most services, the “product” isn’t as clearly predefined as in manufacturing, so it’s hard to make it more efficiently. What counts as good service — be it a clean hotel room or a healthy patient — is often a matter of opinion, and the process of production is frequently inseparable from the service itself. Take the restaurant business. It’s pretty hard to make waiters serve meals faster.
Because so much less is known about how to innovate in the services sector, an economy that loses its manufacturing base ends up sacrificing much of its ability to innovate at all. The consequence is slower growth in living standards.
Manufacturing also pays more than other industries. A forthcoming Brookings report by Susan Helper and myself shows that even after taking into account the characteristics of workers and jobs that influence wages (such as education, occupation, union status, geographic location, and demographics), manufacturing workers earn about 8 percent more per week than employees in other industries. Lower-wage workers especially benefit, earning about 11 percent more than their peers in other businesses, while high-wage workers earn just 4 percent more.
Although manufacturing’s wage advantage may have shrunk after decades of offshoring and union decline, there are reasons why it still exists and will likely continue. Because manufacturing is more capital-intensive than the rest of the economy, downtime is more costly than in other industries. Manufacturers pay a premium to attract and retain workers who are skilled and motivated to keep the machines running. Factories are also typically larger than other business establishments, so it is more difficult for managers to control the production process in manufacturing. That means production workers have to take greater responsibility than in other industries, and manufacturers pay more to find the employees who can handle it.
On average, manufacturers are likely to continue to have greater need for skilled, motivated production workers than other companies. As long as they do, they will continue to pay more than other companies. And as long as that happens, the loss of manufacturing jobs will depress American wages, especially for workers at the lowest rungs of the economic ladder.
Manufacturing Jobs Are Worth Making
Manufacturing matters for innovation and income distribution, but it’s not the only thing that matters. Industry-neutral policies as well as industry-specific ones are appropriate and necessary. Moreover, there are some parts of the non-manufacturing economy, such as computer software, that have some of the same advantages (though not the size) of manufacturing. Likewise, not all manufacturing firms or industries are equally innovative or high-paying. Public policy should be sensitive to these differences.
While America’s manufacturing sector no longer lords over our economy as in the past, it’s still a crucial force. It is more innovative and pays higher wages than other industries. Because that’s likely to be the case for the foreseeable future, public policy should support a healthy manufacturing sector.