Don’t Lose (the) Heart (of the Economy)

 

 

 

Here is an economics riddle: What do $165 billion in net imports in the spring of 2004, 6.9 percent productivity growth in the second quarter of 2004, 3 percent above-average wages in August 2004, and 2.5 million lost jobs since March 2001 have in common? They all are facets of U.S. manufacturing.

The figures also describe the importance of the manufacturing sector to the rest of the economy. It has above-average productivity growth, pays above-average wages, and is at the heart of the U.S. trade deficit. Yet, it has been decimated more than any other sector in the economy since the recession started in early 2001. Regaining strength in manufacturing will be crucial to making the economic recovery stronger and more durable. Since sectoral employment tends to be geographically concentrated, efforts to revive manufacturing will have to focus on the areas of the country where manufacturing is currently concentrated. Today’s release of state employment and unemployment figures by the Bureau of Labor Statistics (BLS) highlights the labor market differences between manufacturing and non-manufacturing states once again.

The economy is plagued by anemic job growth. For the first time since World War II, the economy did not regain the jobs lost in a recession within the first two years of the economic recovery. By August 2004 – 33 months after the recovery started – employment was still 1 million jobs short compared to March 2001, when the recession began. Underlying this job loss was to a large degree the concurrent decline of the manufacturing sector, which, despite recent employment gains, had 2.5 million fewer jobs than at the start of the recession.

Using state-level data from the BLS, states can be classified as manufacturing states, non-manufacturing states, or too-close-to-call, i.e. neither. Manufacturing states can be defined as states that have well above average manufacturing employment levels relative to their total employment, e.g. one quarter standard deviation above the average. A similar measure can be applied to the definition of non-manufacturing states, which would hence have well below average manufacturing levels. Thus, 25 states would be classified as manufacturing states, 15 as non-manufacturing states, and the remaining ten, including California and Texas, as neither.

The employment declines in manufacturing were equally distributed across the United States. Manufacturing employment declined by 14.5 percent in manufacturing states and 15.3 in non-manufacturing states. That is, wherever manufacturing industries were located, manufacturing workers in those areas were hurt by the employment decline equally.

What distinguished the manufacturing states from the non-manufacturing states, though, was that there was no offsetting employment creation in other sectors. Total employment in manufacturing states declined by 2 percent from March 2001 to August 2004. In comparison, total employment in non-manufacturing states grew, albeit at the relatively low rate of 1.1 percent over the course of three and a half years. This amounts to a monthly increase of about 0.02 percent since the recession started.

Not surprisingly, the weak employment creation in manufacturing states is also reflected in rising unemployment rates. From the beginning of the recession in March 2001 to August 2004, the unemployment rate rose twice as fast in manufacturing states than in non-manufacturing states, by 1 percentage point relative to half a percentage point, respectively. The average unemployment rate in manufacturing states was consequently also well above the national average at 5.8 percent.

The picture did not improve in August, as today’s figures from the BLS show. In fact, among the ten states with the smallest absolute employment gains were five manufacturing states – Ohio, Kentucky, Missouri, South Carolina and Washington – and only one non-manufacturing state, Louisiana. The same holds true for the unemployment rate. Among the 10 states with the largest increases in the unemployment rate were eight manufacturing states – Oregon, South Carolina, Tennessee, Minnesota, Alabama, Maine, Ohio and Pennsylvania. Moreover, among the 10 states with the highest unemployment rates, eight were manufacturing states – Oregon, Michigan, South Carolina, Ohio, Washington, Illinois, Alabama and Mississippi.

Bringing manufacturing back to its feet remains an uphill battle. It is good economics to aid the struggling sector given the vital role that manufacturing plays in productivity growth, wages and benefits, and the economic stability of the United States. The current policy of giving massive tax cuts to the rich has not done the job to revive manufacturing through faster labor market growth and fewer fiscal deficits.

  • Employment Change in Manufacturing and Non-manufacturing States, March 2001 to August 2004
    Employment in manufacturing states in August 2004 was still 2 percent below the employment levels of March 2001. In comparison, employment in non-manufacturing states has risen, albeit slowly, by 0.9 percent, which translates into a monthly growth rate of 0.02 percent.
    Note: Manufacturing states are states that had a manufacturing employment share in 1997 that was greater than the average employment share for all states by 0.25 times the standard deviation. These states are Alabama, Arkansas, Connecticut, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Michigan, Minnesota, Mississippi, Missouri, New Hampshire, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont, Washington, and Wisconsin . Non-manufacturing states are defined as states that had an employment share that was more than 0.25 times the standard deviation below the average manufacturing employment share. These states are Alaska, Arizona, Colorado, Delaware, Florida, Hawaii, Louisiana, Maryland, Montana, Nevada, New Mexico, New York, North Dakota, West Virginia, and Wyoming . Other states were not classified. Averages are employment weighted averages.
    Source: Bureau of Labor Statistics, Current Employment Statistics.

  • Change in Unemployment Rate in Manufacturing and Non-manufacturing States, March 2001 to August 2004
    The unemployment rate in manufacturing states has risen faster than in non-manufacturing states compared to the start of the recession. According to the Bureau of Labor Statistics, it increased in 13 manufacturing states in August 2004, compared to an increase in only nine non-manufacturing states.
    Note: Manufacturing states are states that had a manufacturing employment share in 1997 that was greater than the average employment share for all states by 0.25 times the standard deviation. These states are Alabama, Arkansas, Connecticut, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Michigan, Minnesota, Mississippi, Missouri, New Hampshire, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont, Washington, and Wisconsin . Non-manufacturing states are defined as states that had an employment share that was more than 0.25 times the standard deviation below the average manufacturing employment share. These states are Alaska, Arizona, Colorado, Delaware, Florida, Hawaii, Louisiana, Maryland, Montana, Nevada, New Mexico, New York, North Dakota, West Virginia, and Wyoming . Other states were not classified. Averages are employment weighted averages.
    Source: Bureau of Labor Statistics, Current Employment Statistics.

Christian E. Weller is senior economist at the Center for American Progress.