Scott W. Allard, Ph.D.

University of Chicago
School of Social Service Administration

The Avenue | The New Republic

2 years 4 weeks ago Global Innovation: The Metropolitan Edition

It is increasingly well understood that cities are the primary location and mechanism of innovation and, in turn, prosperity (see “The Triumph of the City” or urban scaling). But which cities are the most innovative on earth?

For a long time, getting sub-national economic data for a large number of countries was impossible, but no longer. New data from the OECD show which cities have the most inventors in the world, measured by those who apply for patent protection in multiple countries (under the Patent Cooperation Treaty). Using data from 2005 to 2009, I analyzed these data for 1,847 metropolitan areas (or city-regions) in 48 countries to see what could be gleaned about global innovation, with the understanding that patent applications are a useful but imperfect proxy.

The most glaring finding is the sheer dominance of innovative activity by metropolitan areas. Ninety-three percent of the world’s patent applications are filed by inventors living in metropolitan areas with just 23 percent of the world’s population.

The most innovative metropolitan areas are impressive juggernauts of innovative activity. Ten metro areas account for just 2 percent of global population, but are home to the inventors of 24 percent of the world’s patent applications. They are, in order, Tokyo, San Jose, New York, Boston, Kanagawa (Japan), Shenzhen (China), Osaka, San Diego, Los Angeles, and Seoul. The five U.S. metro areas on that list spur 12 percent of patent applications, even though they represent just 1 percent of world population. All 10 innovation super-charged metro areas boast an average population size of 11 million, which allows their workers and researchers to become highly specialized in their jobs, a dynamic Adam Smith described in the “Wealth of Nations.”

Per-capita rankings of patent applications yield a different set of metro areas that lead on innovation. The most innovation-intensive metropolitan area in the world is San Diego; from 2005-2009, it logged 4.2 applications for every 1000 people. To put this in perspective, the average resident of San Diego is 38 times more likely to apply for a patent than the average person on the planet. But the United States has only one other metro area in the top 10 (San Jose ranks eighth). Several European regions populate the list. The Dutch province of Noord-Brabant, home to the prestigious Eindhoven University of Technology and the Eindhoven-Leuven-Aachen triangle, is second with 3.8 patents per 1000 residents. Next are the Swiss pharmaceutical strongholds of Basel-Stadt and Zug. The German industrial powerhouse of Ostwürttemberg and Cambridge, England--prolific in IT and biotech--rank fifth and sixth, respectively. After Tokyo and San Jose, the final two metro areas in the top 10 are home to major research universities that most Americans have probably never heard of: the Tampere University of Applied Sciences, a leading IT incubator in southern Finland; and the Korea Advanced Institute of Science and Technology in Daejon, where 2.9 patent applications are filed for every 1000 residents.

Which countries supply the most innovation-intensive metro areas? The United States with five (including Rochester, NY; Boston, and Minneapolis in addition to San Diego and San Jose) ranks third. Most leading countries are European. Germany leads with 14 in the top 50, followed by Switzerland with eight. Sweden and Israel are tied with four each. Finland has three, and Denmark, France, Japan, and the United Kingdom all have two. Austria, the Netherlands, Iceland, and Korea each contribute one. (The most innovative countries per capita are all small nations: Sweden, Switzerland, Finland, Israel, and Denmark).

One lesson from all of this is that, at least from an innovation standpoint, Europe is hardly the sclerotic continent that many Americans—especially politicians—make it out to be. Most of world’s top regional hubs of innovation are in Europe. Indeed, this impressive database wouldn’t even be possible without the research effort led by the OECD, based in Paris. This adds to the evidence that Europeans take regional economics very seriously, as should the United States. With residents of San Diego producing 135 times more patents per person than residents of Aberdeen, S.D., does it really make sense to formulate national innovation policies as if geography didn’t matter?

2 years 4 weeks ago What Do Immigrants Do in America?

During economic hard times immigrants are often blamed for taking jobs away from U.S.-born citizens. This recession is no different in that regard. The many incendiary comments aimed at immigrants, especially those here illegally, bandied about the GOP primary reflect that as well.

As job growth has picked up, however, a growing chorus of leaders is pushing for immigration policies that better meet economic demands and help the economy.

Just how do immigrants fit into the U.S. labor market?  A new analysis of Bureau of Labor Statistics data highlights several key industry sectors and the educational status of immigrant and native workers to examine their role across a broad set of industries and occupations. (Note that these data include workers who are foreign-born, but we do not have any information on their legal status.)

Immigrants are a growing share of the U.S. labor force. This is not too surprising given that many immigrants are motivated to come to the United States to work during their prime working ages. And as immigration has increased in recent decades, that share has risen.  More important, perhaps, is with the baby boomers beginning their swift ascent to “seniordom” (like it or not), continuing immigration means more workers to fill in the gaps left by retirement.

There is a much higher share of working age adults who have not completed high school among the foreign-born than among the U.S.-born.  In part this reflects demand for workers in certain industries such as food services and agriculture, but it also reflects the rising educational standards of the United States.

Immigrants are just as likely as natives to have a graduate degree.  This is a reflection of the U.S. labor market as both a skills incubator and a skills magnet.  International students are drawn to the U.S. for study and many stay on after graduation. Others are educated elsewhere and then find jobs in the U.S. because of the lack of opportunities in their home countries and the better prospects here.

In industries such as information technology, life sciences, and high-tech manufacturing, high-skilled immigrant workers are overrepresented. In these industries, workers in science, technology, engineering and math (STEM) occupations are more likely to have readily transferable skills than those in other fields, particularly those that require some U.S.-centric legal, business, or cultural skills.

In sectors such as agriculture, food services, and construction, most of the immigrant workers are low-skilled. Foreign-born workers made headway into these jobs because they are typically low-paying and seen as undesirable by U.S.-born workers. We borrow heavily from our neighbor: Mexican workers make up half of all immigrant workers in construction and food services and 84 percent in the agricultural sector.

Immigrants are well-represented in some of the occupations projected to grow the most or the fastest during the next 10 years.  Many of the projected fast-growing jobs are lower-skilled construction occupations (as that industry bounces back). Additional occupations that are predicted to see large growth are also lower-skilled—health and personal aides, food services, childcare, and laborers. It is likely those occupations will continue to be filled in an outsized way by immigrants.

Debates about immigration policy, among presidential candidates or others, could use an infusion of facts based on empirical evidence. Recognizing the valuable role that immigrants play in the U.S. labor market and understanding the opportunity this presents for the United States are foundational to crafting coherent and pragmatic immigration policy.

2 years 5 weeks ago Making it Here, Selling it There, Creating U.S. Jobs

The Great Recession forced U.S. companies to think in new ways about their growth and survival in the coming years. In 2010, the first year of the recovery, U.S. domestic demand remained sluggish, so American businesses looked for clients outside their  borders, especially in emerging markets, where most global growth has been taking place in recent years. As a result, U.S. exports increased rapidly in the first year of recovery, by more than 11 percent in real terms, the highest growth since 1997.

Increased trade has a direct and positive impact on the economy overall and on job creation. Exports contributed 46 percent to the growth of the U.S. economy between 2009 and 2011. This export surge helped create 600,000 jobs nationally in 2010, even while the rest of the economy was shedding them.

One big reason for this surge was the revival of America’s manufacturing exports. As our new paper, “Export Nation 2012,” describes, 75 percent of the nation’s additional overseas sales in 2010 came from the manufacturing sector, with transportation equipment, chemicals, and machinery leading the way.

This economic boost was felt with particular force in the country’s 100 largest metros. In 2010, these areas produced 65 percent of our exports overall, and in 30 of the 50 states they accounted for a majority of export sales. Eleven U.S. metros evidenced the kind of growth that, if continued, will double their exports in the next five years.

The lesson for policymakers could not be clearer. We have a significant growth opportunity in front of us.  The United States is achieving solid export growth even though, as a nation, we still do not export at the level of many of our global competitors. Only about 1 percent of U.S. firms engage in selling to overseas markets, and the majority of those sell to only one country. Consider the rewards if we employed a more coordinated, aggressive export strategy, one that aligned federal, state, and local efforts to recruit and support the work now going on in our most forward-thinking metro areas, where public and private-sector leaders are building the physical and policy infrastructure to engage foreign markets.

2 years 5 weeks ago Reauthorize the Ex-Im Bank to Foster Exports

Exports are an important growth engine in the United States. Not only do they support millions of jobs in the nation. They also are a vital source of sales for revitalizing the manufacturing sector.

Given the urgency of U.S. economic renewal, this Thursday the Brookings Metro Program will release compelling new research on the dynamics of metropolitan export growth at an event entitled Export Nation 2012. Further discussion will also call for policy and other supports that recognize the importance of harnessing the assets and strengths of the nation’s metro regions as key hubs of state and national exporting.

However, an important policy tool for growing our country’s exports currently hangs in limbo and requires special discussion:  the reauthorization of the Export-Import Bank.

Operating as the nation’s official export credit agency (ECA) under a renewable charter (the Export-Import Bank Act of 1945), the bank provides critical support to U.S. exporters through loans, guarantees, and insurance, especially during times of economic downturn when private capital is scarce.

Yet here is the problem. The bank is currently operating under a temporary extension which will expire on May 31, 2012 and which caps the bank’s commitments at $100 billion--with the bank already reaching a total credit exposure of $89.2 billion at the end of FY 2011. The $100 billion cap is in any case a modest funding amount relative to the magnitude of total U.S. exports, which passed the $2 trillion mark in 2011.

Given the bank’s outsized impact on U.S. exports, economic growth, and manufacturing jobs, reauthorization of Ex-Im Bank should be a fairly easy decision for the Congress. In case it is not, here are some useful reminders.

In FY 2011 alone, the bank provided $32.7 billion in financing which led to about $41 billion in U.S. exports of goods and services, and supported 300,000 export-related jobs and 3,600 companies. The bank estimates that since its inception it has supported more than $400 billion in U.S. exports.

The bank has done this without costing the U.S. taxpayers much. In fact, the bank makes money from the charges it levies on foreign buyers for using its services. In the last five years, the bank has returned $3.4 billion to the U.S. Treasury above the cost of its operations. The Congressional Budget Office estimates that the latest version of the House reauthorization bill--which would increase the bank’s lending capacity to $140 billion--would result in net savings of $900 million over the 2012-2016 period.

Most important though, the Ex-Im Bank addresses a critical market failure. The bank operates as a “lender of last resort” responding to risks shunned by private sector finance. To that end, the bank focuses on exports by small- and medium-sized companies that otherwise would find it difficult to access private sector funding, including those with riskier but innovative technologies.

The United States faces a tough global market for exports. ECAs of other countries--especially ECAs in emerging economies that offer aggressive below-market loans to gain an edge in the global marketplace skirting Organization for Economic Cooperation and Development (OECD) rules--provide several times more export assistance as a share of GDP than the United States does. 

Given these realities, reauthorizing and reforming the Ex-Im Bank’s financing operations for exports is a priority. Without it, meeting President Obama’s National Export Initiative goal to double exports by 2015 will be difficult.

2 years 6 weeks ago ‘Export Nation 2012’ Forum to Explore Metropolitan Export Resurgence

Two years ago the Metropolitan Policy Program at Brookings released a major report entitled “Export Nation” that insisted, in the depths of the Great Recession, that exporting held great promise for generating needed sales and jobs in a rebalanced American economy.   

Because doubling export growth in real terms hadn’t been seen by the United States since the early post-war period, a number of economists naturally expressed skepticism.

Now, the data are coming in and the benefits of a U.S. export push are becoming clearer and clearer.

American exports are seeing their fastest growth in more than a decade. Sales abroad are supporting jobs that are helping to drive the nation’s recovery. And what is more, U.S. regions are central to the action, realizing that exporting is essentially a metropolitan act.

We’ll be further exploring these trends at an event to be held at the Brookings Institution this Thursday. In conjunction with that we’ll also release a new paper entitled “Export Nation 2012: How U.S. Metropolitan  Areas Are Driving National Growth” during a high-profile forum (register to attend here) that will showcase detailed new data on the export strengths of the nation’s 100 largest metropolitan areas one year into the recovery—or one year into the national economic “reset,” as we’d like to think of it. 

Along these lines, Thursday’s event will update and build upon the previous “Export Nation” report, released in 2010 and containing data through 2008, which changed the national dialogue on exports by introducing a more accurate way to measure and map exports across metropolitan areas. 

In this fashion, “Export Nation 2012” will show that metropolitan exports drove the nation’s recovery in 2010, led by a manufacturing resurgence that set 11 diverse metropolitan areas on a course to doubling their exports in five years.

In addition to data, moreover, we’ll present dynamic interactions among metropolitan and federal leaders who will discuss the outlines of a national-regional policy agenda reflective of the reality of an export reality that finds that U.S. metros generate 65 percent of the nations’ exports and over 75 percent of service exports.

In that sense, a national export strategy must by nature be a metropolitan export strategy, and as it happens, smart metropolitan areas are busy developing and coalescing around their own fact-driven, bottom-up export agendas. Given that, a top priority of the federal government’s National Export Initiative should be to support and draw in these Metropolitan Export Initiatives

For example, four metro areas in particular--Los Angeles, Minneapolis Saint Paul, Portland (OR), and Syracuse--are developing sophisticated metropolitan export plans in cooperation with Brookings that employ detailed market intelligence to the development of smarter export-related services and strategies to help their regions’ firms connect better to global customers. For its part, the federal government needs to help create a conducive platform for such local export promotion. The next American economy must be more export-oriented and, to make that so, the nation, and its metropolitan areas, need to work together. 

2 years 6 weeks ago Transformative Investments, Chicago Style

Sometimes if you want something done right, you’ve got to do it yourself.

During his time as White House chief of staff, Rahm Emanuel was unable to push through President Obama’s proposal to establish a National Infrastructure Bank. The NIB would be a merit-driven approach for advancing a range of infrastructure projects that have the highest return on investment and support economic growth. However, prickly issues around congressional jurisdiction, project selection, capitalization levels, and financing mechanisms were left unresolved, and the NIB remains as it has been for decades: the next greatest idea.

So it’s important that now Mayor Emanuel announced the creation of the Chicago Infrastructure Trust (CIT) as the initial policy strategy designed to support the region’s bold new plan for economic growth and job creation. That plan, developed by World Business Chicago (with advice from Brookings, McKinsey and others) focuses on the region’s core economic strengths in areas such as advanced manufacturing, exports, and innovation, as well as putting workers back on the job through energy retrofit projects. Like similar plans and ambitions, the new Chicago plan cites infrastructure as a key economic driver and describes infrastructure-related challenges such as deterioration and lack of reach into low-income neighborhoods as barriers to economic growth.

The CIT hits on most of the important elements of past infrastructure bank proposals. It’s a market-oriented institution that attracts private capital interested in steady returns and makes investment decisions based on merit and evidence rather than politics. Like California’s I-Bank it cuts across different types of infrastructure such as transportation and telecommunications, and like Connecticut’s Green Bank it emphasizes the generation, transmission, and adoption of alternative energy. The CIT also embraces advanced technologies to support next generation place-making by wiring low-income neighborhoods with broadband and developing high-tech research campuses.

The CIT will be capitalized through direct investments from private financing organizations. Those investments will go to supporting specific projects through customized financing (some combination of debt and equity) for specific projects. The initiative will be kicked off with a $200 million effort to reduce energy consumption in municipal buildings, lighting projects, and other energy efficiency projects. The idea is to provide a home for private investors looking for low-risk investments while supporting economy-boosting projects the city wants. Citibank, JP Morgan, Macquarie and others have already expressed interest that could reach $1 billion or more in total investment capacity. So while the energy retrofit project comes first, other projects like bus rapid transit or water could follow next. Stay tuned.

Chicago’s plan is noteworthy because it is the first-of-its-kind established on the local level and it should profoundly inform the new thinking and ideas coming from the states. Virginia recently established a Transportation Infrastructure Bank (TIB) that acts as a revolving loan fund, capitalized with money appropriated from the legislature. Alaska is considering an infrastructure fund that would be treated like an endowment and expected to earn a 6 percent rate of return. A $25 billion fund is taking shape in New York state with details still to come.

The bottom line is that, in the absence of progress in Washington, cities like Chicago are showing the way forward. They are stepping up to devise new ways to conceive and finance a range of infrastructure projects as the physical means to an economy-shaping end, rather than end in itself.

2 years 6 weeks ago Germany’s Next Top Cluster! A Model Competition from Deutschland

Out of the recessionary rubble the “German model” stands tall in economic and policy circles for its resiliency and productivity. The Eurozone may be cracking but the German export machine keeps turning out world-beating manufactured goods with characteristic efficiency. Although fresh scrutiny is rightfully exposing weaknesses in corners of the German economy, experts concerned with the productive sector of the U.S. economy are turning to Germany for lessons.

We at the Metro Program count ourselves among the German industrial sector’s admirers. Just last week, a forum we hosted on why--and which--manufacturing matters lauded the country’s apprenticeship system, high-road shop floor practices, and best-in-class Fraunhofer research institutions, which provide applied R&D services to small- and medium-sized enterprises (SMEs).

Given our worldview, it should come as no surprise that another program has caught our attention: the “Leading-Edge Cluster Competition," or officially “Spitzencluster Wettbewerb.”

The competition should be lauded for its purposeful scale and design.

The cluster competition is a flagship initiative of the nation's High-Tech Strategy 2020, a long-term competitiveness agenda led by the Federal Ministry for Education and Research (BMBF) to bridge science and industry in order to jumpstart the industries of the future.

It was launched in 2007 and comprises three rounds of competition. In each round, five winning clusters are awarded €40 million each over a five-year period to implement their designed strategies. Clusters match the award one-for-one so that at its conclusion, the effort will have galvanized at least €1.2 billion in investment into Germany’s most advanced regional economic engines. The strategic goal: to seize the growth industries that will be key to the future of human development--climate/energy, health/nutrition, mobility, security, and communication--by grounding them in Germany’s top clusters.

The BMBF announced the third and final round of winning clusters in January 2012:

  • Carbon composites in and around Munich to create innovative lightweight materials for presently “heavy” industries
  • Electromobility in Stuttgart to bridge batteries, energy delivery, logistics, software, and transport in sustainable mobility solutions
  • Individualized immunotherapy in the Rhein-Main region to prepare the healthcare system to deal with prevention, diagnosis, and treatment in an aging population
  • The development, scale-up, and commercialization of materials from biomass around Leipzig and central Germany
  • Intelligent technical systems in Westphalia to incorporate ICT and “smart” features into everyday industrial and consumer goods

In each case, private firms (127 of them in the intelligent systems cluster!) partner with local universities, research institutions, vocational schools, industry and labor associations, and other cluster organizations to devise a discrete initiative to advance the industry in the region and the region globally.

In addition to showing significant private financial commitment, winning clusters must demonstrate that the planned projects build on strengths and promise to differentiate the region in the global marketplace with a comprehensive analysis of risk and upside and market positioning.

Awards call for clusters to experiment with new forms of cooperation and collaboration, to professionalize cluster management, and to design cluster-specific training initiatives for the next generation of workers.

All of this is very simpatico to both our metropolitan business planning methodology, which calls for a market positioning analysis and a strategic plan to execute discrete and fundable initiatives to boost the local economy, and the competitive cluster grant program we presented to states as a strategy for job creation on a budget. Both concepts are finding fertile ground in states like Nevada and Michigan and metro regions like Minneapolis-Saint Paul, the Puget Sound, and Northeast Ohio. Our still-nascent manufacturing agenda calls for cluster-specific training programs too. And well-established organizations like San Diego CONNECT epitomize best practice in cluster collaboration.

But would a cluster competition along the lines of the German program be possible at the federal level in the United States? Given the bottom-up embrace of similar ideas, is it even necessary?

Just last year Washington enjoyed its own “Cluster Moment” until deficit reduction politics sapped its momentum. The push nevertheless yielded a number of important policy innovations--the Economic Development Administration’s i6 Challenge Grant, the Jobs and Innovation Accelerator Challenge, and the Department of Energy’s Energy Innovation Hubs to name three of them.

Yet the federal government could play a bigger role in aligning--and inspiring--disparate state and local initiatives around national goals. Indeed that might be the most valuable lesson to draw from the German program: that the federal government should form a long-term competitiveness strategy and then get the incentives right so that regional industry clusters--the nation’s engines of innovation--can take it from there.

2 years 7 weeks ago Advancing Advanced Manufacturing Region by Region

At last a more serious discussion of manufacturing has begun. In just the last month, strong voices have by turns questioned whether manufacturing merits special attention, contended that it does, and then begun to say which sort of manufacturing matters most. Just last week the Metropolitan Policy Program joined with the CONNECT Innovation Institute to produce a major event that contended that regardless of its diminished employment manufacturing remains a powerful engine of innovation, a driver of exports that are taming our trade deficit, and a source of good-paying jobs. 

Now, the National Science and Technology Council has taken a stab at laying out what the federal government might do to advance the more “advanced” higher-tech segments of the manufacturing sector.

Created through an interagency process chaired by representatives from the federal departments of Commerce, Defense, and Energy, the plan documents the fundamental importance of advanced manufacturing to the nation’s economic well-being and sets forth five objectives for federal policy:

  • Accelerate investment, especially by and in small- and medium-sized manufacturers
  • Make the education and training system more responsive to the demand for skills
  • Optimize federal advanced manufacturing R&D investments by taking a portfolio perspective
  • Increase total public and private investments in advanced manufacturing R&D
  • Foster national and regional partnerships among all stakeholders in advanced manufacturing

Again, all of these goals are important, but it is gratifying to see that the new strategy heavily stresses the critical role of regional industry clusters in propelling advanced industries.

How did the interagency working group arrive at such a strong regional focus? Because it realized that advanced manufacturing in America is sustained in Louisville and Wichita and San Jose by the interactions of thousands of small- and medium-sized enterprises (SMEs) linked tightly (or loosely) into geographically-concentrated communities or supply chains.

Very rarely does a manufacturing firm exist in isolation. Instead, advanced manufacturing firms interact constantly with each other and with local research universities and community colleges, labor unions, trade associations, and governments in ways that build up a shared “industrial commons” of shared knowledge assets and even shared physical facilities. Since these commons exist locally, and since ensuring their global leadership will be crucial, regional industry clusters and local manufacturing ecosystems are going to loom large as central units in any strategy to foster these high-value industries. That’s why Bruce Katz and I several years ago called the present era a “cluster moment.” Increasingly, it is being recognized that clusters are a fruitful economic basis for efforts to improve technology platform development, knowledge sharing, training, and research application.

So what might federal engagement to catalyze and strength regional advanced manufacturing clusters look like?

To an extent such work is already underway albeit at too small a scale. Already the federal government is making cluster-based investments that aid and abet the efforts of local educational and research organizations, state and regional economic development authorities, and the private sector to coordinate their activities and to conduct proof-of-concept and commercialization activities.

For instance, the Jobs and Innovation Accelerator Challenge--led by the Economic Development Administration (EDA) in the Department of Commerce in partnership with other agencies such as the Department of Energy, National Institute of Standards and Technology (NIST), and the Small Business Administration (SBA)--will run a competition focused on advanced manufacturing in fiscal 2012.

Programs like these are just the right way to support--with a light touch--the “bottom up” initiatives that are breaking out across the country in U.S. regions.

In any event, it is good to see the federal government thinking seriously about how to defend, renew, and expand America’s crucial advanced manufacturing sector. That regions and local innovation clusters lie at the center of its thinking bodes well, as there may be no other way to engage with these intricate, fast-moving, and regionally varied industries.

2 years 7 weeks ago Manufacturing Job Loss is Not Inevitable

Despite small gains during the last two years, the trend in U.S. manufacturing jobs for the last 30 years has been downward, leading some to argue that long-term manufacturing job loss is inevitable. But our research shows otherwise.

There are two common versions of the “inevitability” argument. One holds that U.S. manufacturing wages are too high to be internationally competitive. The other maintains that manufacturing job losses are the result of productivity growth. Both arguments are false. The United States did not have to lose all of the 6 million manufacturing jobs that disappeared between the beginning of 2001 and the end of 2009. Nor does it have to continue to bleed manufacturing jobs.

High wages cannot be the culprit; because wages in U.S. manufacturing are not especially high by international standards. As of 2009, 12 European countries plus Australia had higher average manufacturing wages than the United States. Norway topped the list with an average manufacturing wage of $53.89 per hour, 60 percent above the U.S. average of $33.53.

Moreover, the United States lost manufacturing jobs at a faster rate since 2000 than several countries that paid manufacturing workers more. Among the 10 countries for which the Bureau of Labor Statistics tracks manufacturing employment, Australia, France, Germany, Italy, the Netherlands, and Sweden both had higher manufacturing wages and lost smaller shares of their manufacturing employment than the United States between 2000 and 2010.

Nor is technology to blame. Factories have become more mechanized, so fewer workers are needed to produce the same amount of manufactured goods. If that were the end of the story, then technology-driven productivity growth would indeed reduce manufacturing employment. But it’s not the whole story. When productivity grows, manufactured goods become less expensive and the market for them expands. The expanding market creates a demand for more workers, and that extra demand usually outweighs the labor-saving impact of mechanization. The result is more manufacturing jobs, not fewer, when productivity increases in manufacturing. 

The huge manufacturing job losses that occurred in the first decade of this century are very difficult to attribute to productivity gains. Between 2000 and 2007 (when the Great Recession began), manufacturing productivity grew at an average annual rate of 3.9 percent—nearly the same as the 4.1 percent average annual rate during the 1990s. If productivity growth were driving manufacturing job losses, then the job losses of 2000-2007 should have been similar to those of the 1990s. That was not the case, though. The nation lost an average of only 0.2 percent of its manufacturing jobs per year during the 1990s, compared to 3.0 percent per year between 2000 and 2007.

If neither productivity growth nor uncompetitively high wages cost us manufacturing jobs, what did? 

One likely reason is there was insufficient productivity growth in U.S. manufacturing. If U.S. manufacturing productivity had grown more rapidly, American manufactured goods would have been more competitive with those of other countries. As a result, the U.S. would have lost fewer manufacturing jobs.

Another likely culprit was incentives for manufacturers to offshore work to low-wage countries, which accelerated after China joined the World Trade Organization in 2001. After China’s accession to the WTO, the U.S. trade deficit with China (which is due mainly to the offshoring of manufacturing) grew at an accelerating rate. The manipulated currencies and artificially low wages of China and some other low-wage countries made those countries attractive locations for manufacturers seeking low labor costs.

Neither massive offshoring nor insufficient productivity growth was inevitable, and neither should be treated as inevitable in the future. Both were the result of public policy choices. The United States could have reduced the incentives for manufacturers to offshore jobs by taking a harder line against China’s currency manipulation and wage suppression. It could have improved productivity growth at home by increasing rather than cutting funding the Manufacturing Extension Partnership program, which helps small and medium-sized manufacturers improve performance.

Chinese wages are growing faster than productivity and manufacturers are beginning to reconsider whether the costs of offshoring outweigh the benefits they receive from it. Funding for the Manufacturing Extension Partnership program has increased, and other federal and state efforts to strengthen manufacturers’ performance are taking shape. These trends are the basis for a more robust federal manufacturing policy. If we build that, the United States can stem and even reverse its losses of manufacturing jobs.

 

 

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Scott W. Allard
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