EYE ON THE PIE: Too much manufacturing is not Indiana's problem

July 24, 2006

We know that, relative to the United States, Indiana is neither a rich state nor one growing with vigor. Two weeks ago in this space, I discussed our more recent employment experiences. A friend read the column and asked, "How much of our lack of job growth is due to the slump or collapse in manufacturing jobs?"

Nationally, only three states (Nevada, and the Dakotas) had any gain in manufacturing jobs between May 2001 and May 2006. Alaska and Wyoming saw no change at all. The remaining 45 states all lost manufacturing jobs, led by California with a 309,000 loss. Indiana lost 50,300 manufacturing jobs. For the nation, the loss was 15 percent over those five years; for Indiana, 8 percent.

How much does the loss of manufacturing jobs mean to a state's performance? One simple way of answering that question is to ignore the interaction between manufacturing and other sectors. That is, simply assume that changes in the number of manufacturing jobs do not have any influence on jobs gained or lost in other sectors.

This is a radical idea, contrary to all economicdevelopment thinking. Normally, it is assumed that, if 100 manufacturing jobs are added to the economy of an area, there would be 130, or 270, or who knows how many other jobs added. However, my casual examination of the data shows no statistical evidence that adding or decreasing manufacturing jobs increases or decreases the total number of jobs in a state in recent years.

From 2001 to 2006, there were 3.4 million jobs added in the non-farm U.S. economy. This was the result of 5.9 million jobs added by government and the private non-manufacturing sectors, less 2.5 million manufacturing jobs lost. Manufacturing might be said to have been a drag of 43 percent on the job market for the nation.

In Indiana, the gross number of jobs added from government and the private non-manufacturing sector was 80,900, while manufacturing lost 50,300, a drag of 62 percent. This ranked Indiana 31st among the 37 states that lost manufacturing jobs but gained jobs nonetheless.

Hawaii, Utah, Florida and Montana lost manufacturing jobs, but, compared with their job gains in other sectors, manufacturing was less than a 5-percent drag. In five states (including New York, Ohio and Illinois), the job loss in manufacturing exceeded the gains in other sectors leading to a net job loss. Three states-Massachusetts, Louisiana (Katrina) and Michigan-lost jobs in both manufacturing and in other sectors. Thus, their total number of nonfarm jobs fell.

It would seem easy to blame Indiana's poor job performance on the manufacturing sector. The truth, however, is that manufacturing in Indiana did well from 2001 to 2006. Our decline in manufacturing jobs was 8 percent, while the national loss rate was 15 percent. Our share of the nation's manufacturing jobs grew more than that of any other state. In a declining sector, we excelled.

Where we did poorly was in the nonmanufacturing portion of the private sector. The nation grew at a 5.3-percent rate in these sectors, while Indiana advanced just 3.3 percent (39th of the 50 states). Thus, manufacturing job losses were a drag on the state's economy largely because the balance of the Indiana economy was not keeping pace with a growing nation.

Before economic developers do something foolish or politicians devise some silly plan to encourage the non-manufacturing sectors, remember this: Despite the fact that it is a manufacturing firm, Honda will do more for Decatur County and the state of Indiana than would a flood of tourists to see the tree in the courthouse at Greensburg.

Yet of greater value would have been getting United Airlines to move its corporate headquarters to one of our cities, rather than settling in downtown Chicago.

Marcus taught economics more than 30 years at Indiana University and is the former director of IU's Business Research Center. His column appears weekly. To comment on this column, go to IBJ Forum at www.ibj.comor send e-mail to mortonjmarcus@yahoo.com.
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