Regional economics ; Manufactures ; Service industries ; Economic development

Ronald H. Schmidt

English

Research Papers in Economics

FABSF WEEKLY LETTER
Number 94-22, June 10, 1994
Manufacturing Bias in Regional Policy
For many regional economic development agen-
cies, attracting new manufacturing enterprises is
pursued with the same fervor as the search for
the Holy Grail. The rationale for this strategy is
that manufacturing is perceived to be more im-
portant to an economy than services. Manufac-
turing, the argument goes, creates physical goods,
while services simply carry out the delivery of
those products. Moreover, manufacturing jobs
are viewed as superior to services jobs because
they are thought to be higher paying.
The challenge of attracting (and retaining) man-
ufacturing jobs has been made difficult by recent
trends in economic activity. Nationally, manufac-
turing employment fell from 26 percent of the
work force in 1973 to only 16 percent in 1993. A
variety offactors are commonly used to explain
this shift. One is high productivity gains that
allow fewer workers to produce more output.
Another is growing international trade that has
allowed firms to move standardized production
activities to low-cost foreign sources. As a conse-
quence, the traditional strategy ofa preference
for manufacturing firms may be at odds with
long-term trends in job creation.
More fundamentally, manufacturing's superiority
and its contribution to regional growth is debata-
ble. This article focuses on several related issues.
First, it looks at evidence from compensation data
which suggests that the Sunbelt region has had
the fastest income growth in the last twenty
years, yet it also is the region that started with
and continues to have the smallest share of em-
ployment in manufacturing.
for example, is predicated on the importance of
services-identifying and satisfying customer
needs. Thus, service jobs may have become
more integral to the manufacturing process.
Industry contributions to income
Differences in industry structure are widely be-
lieved to be responsible for differences in eco-
nomic growth among regions. Income in Texas
clearly is linked to the fortunes of the oil industry,
while northern California and Massachusetts
have had strong income gains tied to the devel-
opment of high-tech industries. A key measure of
the differential importance of industries to a re-
gion is the relative growth of compensation paid
to labor by those industries. This statistic, which
includes wages, benefits, and proprietor's in-
come, provides an estimate of the direct impact
of those industries on the region's economy.
As shown in Figure 1, services accounted for a
large share of the total compensation gains be-
tween 1969 and 1990. Adjusting for general infla-
tion,total compensation paid in services industries
rose 207 percent, while compensation paid in
manufacturing rose only 12 percent. The figure
Figure 1
U.S. Real Compensation Growth by Industry,
1969-1990
Percent
250,
200
150
Second, changes in industrial structure may dis-
guise the sources of regional growth. For exam-
ple, increased out-sourcing of some functions
(accounting and design, for example) has pushed
some workers formerly classified in manufactur-
ing industries into service industry classifications
with no real change in function.
More fundamentally, the importance of services
may have increased. Service functions, such as
advertising, marketing, and customer service,
have become more important to business strat-
egies and success. "Total quality management,"
100
50
o IFRBSF
Figure 2
Real Compensation Growth by Region
and Industry, 1969-1990
As a result of this change, traditional character-
izations ofthe production process have become
tries of 137 percent, while the Snowbelt region
had growth of 80 percent. In contrast, goods pro-
duction compensation rose 57 percent in the
Sunbelt, while falling 4 percent in the Snowbelt.
Manufacturing and the new economy
Another source of evidence questioning man-
ufacturing's importance in regional and national
economic growth stems from significant changes
in economic structure. First, increasing commu-
nication and transportation networks have al-
lowed manufacturing to become more diffuse,
with parts, assembly, design, marketing, and stra-
tegic control for a given product potentially scat-
tered around the globe.
• All Industries
EI Goods-
Producing
o Service-
Producing
Snowbelt Sunbelt
While stronger goods-producing industries in the
Sunbelt region explain part of the better overall
performance of that region, service-producing
industries provided most of the total gain. As a
share of total compensation, goods-production
fell from 35 percent in 1969 to 27 percent in
1990 in the Sunbelt region, while falling from
43 to 29 percent in the Snowbelt region.
The two regions have roughly converged to the
same lower share of goods-producing industries,
therefore. The Snowbelt reduced its share through
an actual decline in goods production coupled
with modest gains in service-producing indus-
tries. The Sunbelt, on the other hand, increased
both sectors, but not proportionally. The service-
producing sector rose considerably faster than
did the goods-producing sector. Notably, the
Sunbelt maintained higher average compensation
growth than the Snowbelt despite having a lower
share of goods-producing industries.
Percent
160
140
120
100
80
60
40
20
o
-20
Clearly, the Sunbelt regions-the Far West,
Rocky Mountain, Southeast, and Southwest re-
gions-have experienced faster income growth
than the Snowbelt regions-the Great Lakes,
Mideast, New England, and Plains regions. Be-
tween 1969 and 1990, real compensation in the
Sunbelt region rose 108 percent, while com-
pensation in the Snowbelt region rose only 44
percent.
also shows that all the other major service-pro-
ducing industries have had faster total compensa-
tion growth than manufacturing. Transportation,
communication and public utilities (T.C.P.U.),
wholesale and retail trade, finance, insurance,
and real estate (EI.R.E.), and government all had
faster growth in compensation than manufactur-
ing. Even the other goods-producing industries-
mining and construction-had faster compensa-
tion growth.
Because of this faster growth in nonmanufactur-
ing compensation, it no longer is the case that
broadly defined service-producing jobs are lower
paid than goods-producing jobs. Work by Dupuy
and Schweitzer (1994) suggests that the distribu-
tion of wages in services-producing jobs-both
average wages and the dispersion ofwages-
now is almost identical to the distribution of
wages in the goods-producing industries.
Average compensation per worker in narrowly
defined services remains below that in manufac-
turing, but the gap is narrowing. The average
wage was 70 percent ofthat in manufacturing in
1969, but it has risen to 77 percent of manufac-
turing's average by 1990. Moreover, in other
service-producing industries, averagewages are
comparable to those in manufacturing. Wages in
financial industries and wholesale trade are simi-
lar to the manufacturing average, while utilities
had higher average compensation and average
government compensation was only slightly
lower than in manufacturing.
Regional growth implications
At the regional level, differences in income
growth attributed to different industries generally
follow the national pattern. Figure 2 presents a
comparison of total real compensation growth by
majorregion, and breaks outgrowth rates ofgoods
producing and service-producing industries.
The industry breakout is revealing. In both re-
gions, service-producing industries reported very
strong growth in compensation relative to that
reported in goods-producing industries. The Sun-
beltregion had growth in service-producing indus-less meaningful. For example, hiring outside law-
yers and accountants may not change the actual
production process for a manufacturing plant, but
those workers may be reclassified from manufac-
turing to legal or business services industries. (All
employees at a work site are given the same in-
dustry designation based on the principal activity
taking place at that location.) Similarly, replacing
inside programmers with outside computer con-
sultants adds workers counted in business serv-
ices, while potentially decreasing the numberof
workers classified in manufacturing.
Apart from this shift due to out-sourcing, changes
in output markets have emphasized the role of
services in the value-added chain. Part ofthis
change has been the result of improvements in
production technology. For example, increased
flexibility in production has made it possible to
generate customized products at near mass pro-
duction prices. Thus, firms have focussed their
attention on defining market niches and meeting
varying customer demands.
In this new method of organizing economic
activity, business services account for a more im-
portant part of the production process. Between
1969 and 1990, compensation gains in business
services accounted for 6.1 percent ofthe total
increase. This contribution was especially strong
in the Sunbelt regions.
Moreover, consumer demand has changed signif-
icantly, with greater emphasis on services con-
sumption. For example, between 1969 and 1990,
health care accounted for 9.6 percentage points
of the nation's 69.1 percent increase in total com-
pensation. In other words, more than one-seventh
oftotal gains in real compensation over the period
vvere reported by the health care sector. Further-
more, wholesale and retail trade, and finance,
insurance, and real estate showed disproportion-
ately large increases in compensation growth.
Some industries also shrank during the period or
remained fixed. Primary metals, fabricated met-
als, textiles, apparel, and leather manufacturing
all had real decreases in total compensation dur-
ing this period nationally. And many ofthese in-
dustries have emerged fundamentally changed;
for example, the steel industry has shifted em-
phasis from high-volume generic steel production
to higher value-added specialized steel products.
Food production is another example of change.
Agriculture showed little change in real compen-
sation over the 1969-1990 period, while total
expenditures on food rose 36 percent. The ad-
ditional value is captured notonly by manufac-
turers that created higher value-added products
(microwave dinners), but also by the marketing
and advertising firms thatprovide key input into
identifying and targeting specialized consumer
niches.
The implications ofthese changes in industrial
structure for regional economic development
plans are profound. In particular, the old model
of manufacturing as a relatively vertically intec
grated source of jobs is less prevalent than a
model in which manufacturing activity is dif-
fused geographically and most of the value
added is created by service activities designed
to identify market niches, coordinate production
from a network of worldwide suppliers, and mar-
ket the product. Thus, the actual physical pro-
duction activity is contributing a smaller part of
the product's total value compared to the service
activities that surround that activity.
Conclusions
The bias towards attracting manufacturing held
by many regional economic development plan-
ners appears to be increasingly questionable. In
fact, evidence presented here suggests that non-
manufacturing industries have added most of the
income growth, as well as most of the employ-
ment growth. Moreover, regions that have grown
the fastest have been those with the fastest
growth in services.
Long term, this shift suggests an evolution of the
economy. While some of the shift is definitional
-out-sourcing, for example-much of the shift
reflects fundamental changes in the nature of
output markets and the value added by service
industries. Increasing globalization is leading to
a more geographically dispersed production pro-
cess. Moreover, standardized assembly line pro-
duction is becoming less important as a share of
value added, while other activities, traditionally
viewed as services, are becoming the most im-
portant source of value added.
Ronald H. Schmidt
Senior Economist
Reference
Dupuy, Max, and Mark E.5chweitzer. 1994. "Are
Service-Sector Jobs Inferior?" Federal Reserve Bank
of Cleveland Economic Commentary (February 1).
Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of
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Manufacturing bias in regional policy

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Manufacturing bias in regional policy

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