Perspectives on Manufacturing

I have been sharpening my understanding of the manufacturing sector as a focus for local economic development. Clearly, much has changed in manufacturing, not just in the U.S., but worldwide. Many myths and much misunderstanding abound about manufacturing. I think it is high time for some more sensible thinking about this issue.

I have been reviewing some of the recent research literature on what is happening in manufacturing and where the sector is headed globally. Let me share an article that I found especially interesting on this topic. This is a paper by Andrew Bernard at Yale University and two other researchers. Its title is very appropriate: "Survival of the Best Fit: Competition from Low Wage Countries and the (Uneven) Growth of US Manufacturing Plants." I really like his "best fit" concept, which says we should be thinking of industrial competitiveness in terms of where different industries can find their best locational fit.

Here is an abstract of the paper. "We examine the relationship between import competition from low wage countries and the reallocation of US manufacturing from 1977 to 1997. Both employment and output growth are slower for plants that face higher levels of low wage import competition in their industry. As a result, US manufacturing is reallocated over time towards industries that are more capital and skill intensive. Differential growth is driven by a combination of increased plant failure rates and slower growth of surviving plants. Within industries, low wage import competition has the strongest effects on the least capital and skill intensive plants. Surviving plants that switch industries move into more capital and skill intensive sectors when they face low wage competition."

The authors find two important trends dominating the manufacturing sector over the past 30 years. First, the manufacturing share of employment has fallen sharply while the manufacturing share of real output has fallen far less. Second, the composition of industries within manufacturing has tilted towards the production of capital and skill intensive sectors. Sound familiar? I thought so.

If you want to read the article, go here.