SUMMARY
This study assesses the widely-held belief that manufacturing industries are uniquely important to the process of national economic growth. The study’s related purpose is to describe structural changes in the U.S. manufacturing sector and the organization of U.S. manufacturing firms that are helping to determine the pace of economic growth and the creation of economic opportunity. Taken together, these changes comprise the new face of American manufacturing.
Manufacturing and National Economic Growth
Part I of this study finds that manufacturing industries do have special growth-inducing properties. More than other industries, they allow specialization in the production process and they develop technology and disseminate it throughout the economy.
Theoretical support for this conclusion comes from an economics literature that stretches back through Alfred Marshall to Adam Smith, and forward in this century to Allyn Young, Nicholas Kaldor and others. Evidence is embedded in an expanding body of research showing that manufacturing industries are the economy’s most prolific generators and disseminators of technology and that this function is a predominant influence on overall output and productivity growth. In this regard, manufacturing industries are properly described as engines of economic growth.
Further evidence comes from official estimates of interindustry input-output and employment relationships indicating that, compared with nonmanufacturing industries, manufacturing involves more numerous and varied inputs of goods and services and cultivates a greater variety of production skills. Simply put, manufacturing exercises the economy more broadly than other kinds of production activity.
The New Face of American Manufacturing
The new face of American manufacturing reflects a process of relentless, technology-driven change in the composition of production, the quantities and mix of skills required, and the organization of U.S. manufacturing firms. These changes, which constitute the structure and substance of the growth process itself, are examined in Part II.
Change in the Composition of Output
Recent experience shows that manufacturing industries do not grow stronger (or weaker) together, in time with some general rhythm of economic history. Rather, growth is concentrated in a relatively limited group of industries that gain output share quickly, displacing predecessors and creating new venues for enterprise and employment. The most dramatic of these changes reflect major advances in product and process technology—e.g., in recent decades, the emergence and explosive growth of the computer and related industries, and the substitution of plastics for steel in auto production.
Change in the Composition of Employment
Though manufacturing industries have supplied a relatively constant share of GDP for half a century, the direct link between growth in manufacturing output and the spread of economic opportunity in America is now more tenuous. First, manufacturing accounts for a steadily declining share of total U.S. employment. Second, compared with the 1960s, proportionately fewer manufacturing jobs are concentrated in blue-collar categories. Moreover, erosion in the average wage of manufacturing workers relative to service workers contradicts the common assumption that any manufacturing job is, by definition, a good job.
Manufacturing employment declines are not direct consequences of high productivity growth and innovation. In many U.S. manufacturing industries that added workers during 1977-87, any short-term job displacement because of productivity gains was more than offset by increased final demand—possibly the result of lower costs. Also, despite rapid declines in unit labor requirements, many of these industries added jobs by becoming more important suppliers to other industries—i.e., because of changes in production technology.
Change in Corporate Structure
At every stage of modern economic history, aggressive companies have energized the growth process by organizing to exploit production efficiencies inherent in new technology. The organization that a century ago best exploited advances in mechanical technology (e.g., steam power, direct reduction of metals) was typically large, hierarchically organized, and capital-intense. In recent decades, however, dramatic changes—especially the intensification of global competition and epochal advances in information technology—have begun to favor organizations that are smaller, flatter, and more flexible than their predecessors.
Evidence of the new era has begun to appear in official data. On average, manufacturing establishments are smaller than they were ten years ago. A decline in the relative importance of white collar manufacturing employment since 1990 suggests that they are also flatter—that companies are dismantling management hierarchies originally built to process, verify, and distribute information. In addition, anecdotal evidence suggests that the information revolution has spawned new systems of networked production in which small specialized firms use shared information to coordinate their activities, simulating the performance of much larger integrated companies. Such networks have the potential to transform the character of business competition from a contest of scale-driven broadly-focused bureaucracies to a contest of highly specialized firms that create value by leveraging world class skills into commanding positions in precisely defined intermediate and final markets.
Addendum on the Importance of a Strong Domestic Manufacturing Base
Evidence that manufacturing industries play a special role in the growth process leaves unanswered the question of whether the benefit of goods production to any nation’s economy is diminished when the production happens off shore. Why, for example, should the productivity enhancing effects of an inventory tracking system depend on the nationality of the operating hardware? An addendum to Part II examines two compelling common-sense answers to this question: first, that a strong domestic manufacturing base is essential to balanced trade; and second, that manufacturing industries are geographically linked to high-value added services. Neither answer is definitive.