Opinion and Economic Analysis

HICKS: Economic evolution requires ongoing flexibility

March 2, 2013

I am often asked some version of the question, “Can we really survive becoming a service economy—won’t our loss of manufacturing jobs spell doom for our country?”

The answer is, “No.” If we face doom, it is mostly short term and not a product of our industrial change. Here’s why.

First, we are and always will be a manufacturing nation. We simply will continue to grow our manufacturing production with a smaller share of workers. That is exactly what happened to the Midwest a century ago, when some bright soul attached an internal combustion engine to a plow, leading to the loss of millions of good agriculture jobs.

In truth, the excess supply of workers from that period made the Midwest fertile for manufacturing growth. The young men who found themselves unable to make a living on family farms were perfectly suited to the manufacturing age of the 20th century. These workers were accustomed to solving problems and tinkering with a hit-and-miss engine, and were unafraid of hard work.

Even today, manufacturing thrives. This will be a record year for manufacturing production in the United States, topping the high mark set in 2012.

The history of machinery, management and productivity growth tells an important story about where we are as an economy and where we might be heading. In 1970, the average manufacturing worker produced about $60,000 of goods in today’s inflation-adjusted dollars. In 2012, that number topped $190,000. So, what took three factory employees to make 40 years ago is now produced by one worker.

Wages for manufacturing workers have risen, making them prized jobs, but pay hasn’t risen as fast as productivity. The reason: Much of the growth in worker output isn’t due to more-skilled workers, but to better machinery and better-managed production processes. So the benefits of the productivity gains are used to improve equipment and hire more talented managers.

Still, over time, the work force and the way it is compensated will change. As an increasing share of labor costs are allocated to taxes and health care, there will be a downward pressure on take-home pay.

At the same time, the accountants are pressing managers to hire better workers. The machinery required for production requires different skills now than it did in 1970. And those skills decay more quickly (as anyone who uses computers can attest).

Also, with fewer workers on the shop floor, mistakes and absenteeism are more costly. So, manufacturers are looking for those who can learn computer skills and relearn the processes every few years.

Whether or not economic change is for good or ill is solely a result of how we adjust, not the change itself. It requires only the same adaptability we enjoyed in the last century.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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