Can Manufacturing Survive in U.S. and Other Advanced Countries?

The decline in manufacturing jobs in the U.S. and other major nations shows no signs of slowing, according to a comprehensive new study released today by The Conference Board.

The study reveals that in both good times and bad times in the U.S., at least 16 million jobs are created or destroyed each year – 14 percent of all U.S. employment. U.S. manufacturing jobs have been particularly hard hit in the current recession, dropping 7.8 percent – a decline more than three times larger than the 2.2 percent dip during the two year period following the recession of 1990-1991. Yet the study also points out that manufacturing jobs have been on the decline in the U.S. for many years.

These same trends are underway in other advanced countries, ranging from Germany and France to Japan and Taiwan. All are registering declines in the relative size of their manufacturing sectors. These shifts are being spurred by productivity gains and the exodus of factories from Japan and other countries. Rapidly growing software development in India is raising similar concerns. The study indicates that more and more resources in the major countries are being shifted to services, while emerging countries are moving resources from agriculture into manufacturing as well as services and both are redeploying resources within manufacturing and services.

Says Dr. Robert McGuckin, author of the study and Director of Economic Research at The Conference Board: “While job destruction and job creation are part of the regular fabric of economic activity year in and year out, manufacturing is drawing attention because job losses remain high and are not being made up by greater job creation in expansions.”

The Conference Board study points out that not all manufacturing job losses are due to outsourcing, offshoring and moving production abroad. Some involve temporary layoffs and permanent reallocations from one U.S. industry to another in response to technological improvements and shifts in consumer demand. The study emphasizes that job reallocation is a major driver of productivity growth and improved living standards.

Declares Dr. McGuckin: “The key focus of the ongoing debate about job losses should concentrate on improving the reallocation of resources and finding a consensus on how to help workers who have been adversely affected by these intensifying trends.”

JOB LOSSES AND NATIONAL SECURITY
Increases in cross-border allocation of resources throughout manufacturing raises questions about the strategic importance of manufacturing in the nation’s overall security system. Among the major questions being asked: is manufacturing a crucial part of national defense efforts and does cross-border production weaken national security? Are research and development in manufacturing key drivers of new technologies and especially vital in improving productivity and living standards? How can security be maintained in a world of increasingly intertwined economic relationships?

These security issues are not being raised only in the U.S. but in many other major countries as well.

According to McGuckin, “these issues need to be addressed directly and specifically and not simply as part of the reaction to job losses in manufacturing. The strategic importance of the manufacturing sector per se involves at least two major considerations: 1) How much and what capabilities must be maintained ready for the support of defense systems, and 2) What is the strategic role of manufacturing in the nation’s research and development effort that supports security?”

Neither question is easy to answer. But both should be approached in the context of today’s world where intelligence and information are increasing in importance and information and communications technology is transforming operational possibilities. Similarly, the face of research and development has been changing quickly and new organizational structures and business practices need to be factored into the analysis. McGuckin notes that “The Conference Board currently has underway a major study of international R and D organization, which I hope will provide some guidance on these organizational issues.”

GLOBAL JOB SHIFTS ON PRODUCTIVITY AND LIVING STANDARDS
The Conference Board study shows that the decline in manufacturing employment growth was well underway in the 1980s. Job destruction during the 1980s averaged 10.3 percent while job creation was only 9.1 percent. This 1.2 percent difference between the loss of jobs and the creation of new jobs signaled the continuing and long-run decline in manufacturing jobs.

But the shift in jobs is a major factor in productivity growth, as employees shift from low to high productivity business firms and business units. This process shows that new and growing companies replace declining and uncompetitive ones. Many of the productivity gains are due to entirely new enterprises.

“It’s all part of the Schumpeterian ‘creative destruction’ story,” concludes McGuckin. “We now know that the job creation and destruction process that accompanies these reallocations is an essential ingredient of productivity growth and improved living standards. It is a process that has been going on within the U.S. for a long time, and while the increased cross-border nature of the reemployments raises new challenges, the process provides win-win opportunities.”

Source: Can Manufacturing Survive in Advanced Countries?
Executive Action No. 93
The Conference Board