In recent decades doomsayers have lamented the demise of American manufacturing power and predicted the end of the Industrial Age in America. They cite the steadily declining number of people working at manufacturing jobs. According to these sources, manufacturing jobs have been out-sourced overseas where cheaper labor costs have reduced the product costs and increased profits. If you look at manufacturing in general there is some truth to this data. However, this is a simplistic forecast of doom.
Economists have noted that as countries get richer and more prosperous, the manufacturing component accounts for a smaller portion of Gross Domestic Production (GDP). This phenomenon has been documented in numerous studies over the decades. The decline of manufacturing usually starts when it becomes approximately 20-35% of GDP. Although manufacturing declines as a percentage of GDP, the total output in dollars continues to rise. In fact, as the number of workers in American manufacturing has been decreasing, the dollar value of manufacturing output has been increasing. We have been producing more products, and more expensive products, with fewer workers. As plant managers we get nice bonuses for doing that in our factories. Why is this bad for the national economy?
There will always be products with a high labor content that can be manufactured more cheaply in low wage countries. As these relative cheap, high labor products are moved overseas to emerging market countries, rich counties move from low priced products with high labor content to new products with a higher value. These new products require skills in designing, programming, and machining high tech products and innovative gadgets. We see these costly products in the markets for high tech electronics, specialty chemicals, and sophisticated machinery. Typically these higher priced products are made in smaller quantities, and are more frequently upgraded with new features. You don’t manufacture these products in developing countries. They are better manufactured in the rich developed countries of the world.
Although the United States ran a trade deficit in 2010 of $342 billion in those goods with a high labor content (textiles, furniture, for example); in the markets for cars, chemicals, drugs and machinery there was a $726 billion surplus.
The richer countries have the worker skills that can develop and make the highly engineered, high priced products. The bigger risk is not the amount of goods being sent overseas to be manufactured and returned to the US; it is the ability of America to maintain a highly skilled labor force to continue to make sophisticated products. Many American companies have been searching for skilled foreign born engineers and programmers because the demand for these skills can’t be filled from the domestic labor pool. Many of my clients are frustrated by the lack of trained mechanics, programmers and machinists to operate and maintain new complicated machinery. Process equipment in many plants requires highly skilled personnel to produce the high quality products that their customers demand.
If America is to continue its growth and dominance in the manufacturing world, it must build an education system that provides skilled workers to make these new products. This is where the real problem lies for American manufacturing. This is why we hear an almost daily cry from American CEOs for a stronger education system in science, technology, engineering and mathematics. The education system in America is now part of our manufacturing infrastructure.
Source: “Manufacturing: The New Maker Rules”, The Economist, Nov. 20, 2012, page73-74.
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