Jobs and wages in manufacturing

By Bill Kaye-Blake 25/11/2012 4

The New York Times Magazine had a short article on jobs and wages in manufacturing in the United States. The description of the situation was interesting. Businesses are trying to keep costs down. They are therefore finding it hard to hire workers — one CEO found 10 suitable employees from over 1,000 applications. Potential job candidates, meanwhile, are looking at the options available and choosing other work. Technology is also changing, so employees need to be better skilled:

Running these machines requires a basic understanding of metallurgy, physics, chemistry, pneumatics, electrical wiring and computer code.

Somewhere in the middle was this:

Manufacturers, who face increasing competition from low-wage countries, feel they can’t afford to pay higher wages. Potential workers choose more promising career paths. “It’s individually rational,” says Howard Wial, an economist at the Brookings Institution who specializes in manufacturing employment. “But it’s not socially optimal.”

I’m struggling with this. The businesses and workers are weighing up the options and making the best decisions they can — optimising their private welfare. Wial maintains that this is not socially optimal. What would cause this gap between private and social welfare?

One possibility is that some third party is being hurt. Who could they be? Other employers aren’t being hurt. It’s not like a subsidy story, in which subsidies for manufacturing jobs create costs for others. Other employees aren’t being hurt. There are still job openings and wages aren’t collapsing. A worker can invest in training and ‘will probably have a job for as long as he or she wants one’. Consumers aren’t being hurt. Prices of manufactured goods are falling, which is creating the problems. It doesn’t look like there’s any significant externality.

A second possibility is that poor information and uncertainty are creating extra costs. Poor information could cause businesses to miss out on work or cause candidates to avoid manufacturing jobs. Uncertainty around technological change and international trade could cause the industry to hold back — to limit investment in machinery and skills to limit exposure to risk. These things do create costs. But these costs have associated benefits: more certainty and less stress, and people keeping their options open for future opportunities. In addition, there’s no indication that manufacturing is any different from other industries.

Just because people aren’t satisfied with the situation doesn’t mean it isn’t socially optimal. An employer would love to have a smart, capable person willing to work cheaply. The problem is that smart, capable people tend to have other options. A worker might find a manufacturing job interesting, but as a society we place more value on being manager at a fast-food outlet.

Why have I spent so much time on this? For two reasons:

  • In New Zealand, we must accept that prices — wages and final prices — are telling us something about what’s valuable and what isn’t. Saying that we ‘should have’ a certain number of jobs in manufacturing or that wages ‘should be’ at a certain level requires a solid, sensible explanation.
  • This article quotes an economist from a well-known organisation saying something that sounds sciency and authoritative, but is really just a feeling dressed up in jargon. Maybe it was a throw-away line to him, but the rest of us economists now have to be janitors, cleaning up behind him.

4 Responses to “Jobs and wages in manufacturing”

  • Only an economist could look at this and ask in such a non-plussed way “whats the problem?”

    Using the metaphor of the economy as an ecology, its reasonably easy to see that wide diversity is a good thing – it supports a long-term (often generational) strength and resilience that a more narrowly diversified ecology can’t do. The issues of mono-culture in biology and especially horticulture are well known and documented – a recent case in NZ being PSA in kiwifruit.

    It is therefore reasonable to believe (although I’d hate to try and do the research and analysis to back my broad and sweeping claim) that an economy with a mix of trading, manufacturing, service and primary industries will, in the long term, provide a better environment that can withstand external shocks. Any economy that relies on a single or even a small handful of lead industry sectors (primary produce anyone?) is heavily exposed if that industry or its market falters.

    There is also the issue of cross fertilization – a strong manufacturing base for example means that innovations in other fields can be supported. Think Gallaghers (sp?) and the agriculture industry.

    For this sort of stuff to occur society has to direct effort and resources – as you note the best overall outcome is not necessarily the best individual outcome. Your belief in the invisible hand notwithstanding, there is plenty of current evidence that market prices are not a good indicator of a value proposition.

    • RBNZ puts a lot of the weakness in manufacturing down to weakness in construction. See Gael Price here:

      An important factor behind this broad-based weakness in manufacturing was weakness in the domestic construction sector. Construction activity contracted by 22 percent between the December quarter 2007 and the December quarter 2009, and remained low in the following years. As we saw in figure 10, construction is highly dependent upon manufactured inputs. The fall in construction activity represented a
      significant decline in demand for the manufacturing industry. The elasticity shown in figure 10 implies that the construction industry contraction that took place between December 2007 and June 2012 is consistent, by itself, with a cumulative 8.5 percent fall in manufacturing activity – quite close to the fall that actually occurred (figure 16).

      Shame that Councils have made residential construction close to illegal.

  • @Ashton. It is reasonable to think that diversity could provide a social value in excess of the value to the individual decision makers (to couch it in economics jargon, refer to “quasi-option value”). But it is a very long draw of the bow to suggest that the U.S. is anywhere remotely close to a point of having a GDP mix that has dangerously low diversity. And, it would be much easier to make a diversity-value case that an economy had too low a level of agriculture or of high-human-capital services, than for manufacturing, since manufacturing is the easiest sector to grow from nothing quickly if circumstances call for that.

  • @ Ashton: Seamus has hit on the main issues. I just wanted to add two things:
    1. Your argument is that a different mix of industry would be better in the long term. How do we measure that? How do we decide that it is ‘better’ not just for us but for future generations? These are not trivial questions — they have to be answered before we start saying that some other mix would be better.
    2. It isn’t so much asking, ‘What’s the problem?’ I’m actually asking, ‘What’s the solution?’ I can accept that there is a problem. I’m just not convinced that the cure is better than the disease.
    Thanks for commenting.

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