Economic Development, Government, and Manufacturing

Report says automotive optimism ‘misplaced’

Michigan Future study indicates factory jobs are lagging those in knowledge-based services.

November 11, 2013
| By Pete Daly |
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Michigan’s auto industry is on a roll again, and a lot of people are counting on it to keep rolling. But a new study released by Michigan Future Inc. shows the U.S. economy will become increasingly reliant for well-paying jobs in services rather than the production of goods.

The Ann Arbor-based think tank released a new report today examining how Michigan can return to prosperity. “The New Path to Prosperity: Lessons for Michigan from Two Decades of Economic Change” reviews the changing patterns of employment and private sector income from 1990 to 2011 in the United States, and compares Michigan and Minnesota, in particular.

The report is co-authored by Michigan Future President Lou Glazer and Don Grimes, senior research specialist at the University of Michigan’s Institute for Research on Labor, Employment and the Economy.

The report details the dramatic changes in employment and employment earnings over the last 20 years in five sectors of the economy: manufacturing; other goods producing (construction and natural resources); knowledge-based services (private health care and social services; finance and insurance; information; professional services; and management of companies); other private services; and government

Glazer told the Business Journal that getting Michigan’s economy “back to where it used to be is not going to be factory-driven anymore.”

In the study, the authors conclude: “We do not know if the coming decade or two will be more like 1990-2001 or 2001-2011 or someplace in between. What we are confident of is that, primarily due to the ongoing force of globalization and technology, the American economy will become more and more service-, rather than goods-producing, based. And in that economy, knowledge-based services are almost certain to be where job growth is the strongest and average wages are the highest.”

Glazer and Grimes said the state data shows how Minnesota’s knowledge-based economy has propelled it to greater job growth and prosperity, while Michigan’s reliance on manufacturing has been an important factor in its economic decline.

Over the two decades, manufacturing employment in the U.S. fell by nearly 5.8 million jobs, a decline of 32 percent. The share of workers in manufacturing fell from 13 percent to 7 percent.

In contrast, employment in knowledge-based services grew by nearly 16.5 million for an increase of 55 percent. Knowledge-based services’ share of American employment grew from 21 percent to 26 percent.

The change in employment earnings (wages and employer-paid benefits) was even more pronounced. U.S. employment earnings per capita from manufacturing, adjusted for inflation, declined 29 percent over the two decades. The share of private sector employment earnings per capita from manufacturing fell from 21 percent to 12 percent.

U.S. employment earnings per capita in knowledge-based service grew by 52 percent. The share of private sector employment earnings per capita from knowledge-based services grew from 33 percent to 41 percent, almost completely offsetting the decline in manufacturing’s share.

“Factory jobs and their contribution to a middle-class society have tumbled dramatically across the nation, while jobs and employment earnings in knowledge-based services have become the key driver of prosperity,” said Glazer.

In 2013, Michigan Gov. Rick Snyder repeatedly promoted the auto industry’s role in Michigan’s economy. At the 2013 Michigan Automotive Summit in Detroit in September, he said “the North American auto industry is roaring back and Detroit is at the center of it.”

Snyder said suggestions over recent years to diversify Michigan’s economy so that it isn’t as dependent on auto production are “a backward concept.”

“Now is the time to double down and say, let’s do it well,” Snyder added.

Glazer said that starting in 2010 and each year thereafter, there was a resurgence in auto production that he calls a “cyclical bounce” back from the bankruptcies of General Motors and Chrysler.

He said optimism about the auto industry resurgence “is misplaced, because of globalization and technology. There are these mega-forces that are simply changing the economy.” Those forces are “structurally reducing the number of people that are working in factories — and how much people get paid in factories. It’s really a combination of both.”

Glazer noted Michigan’s unemployment rate is still 9 percent, and the state’s per capita income ranked about 35th among all states.

“The question is, if you want unemployment substantially lower than 9 percent, and if you want our per capita income to be above the national average, you cannot get there with just a cyclical bounce in the auto industry,” said Glazer.

“The lesson Michigan needs to learn is clear: The places that are doing best today and almost certainly will do the best in the future are those states and regions that are concentrated in knowledge-based services, not factories. In a global economy, knowledge-based sectors are now — and are likely to be even more so in the future — the core of the more and better jobs Gov. Rick Snyder has rightly identified as the state’s economic goal,” Glazer said.

According to the report, over the two decades Michigan substantially lagged the nation in both employment and employment earnings growth. Employment was up 7 percent compared to 27 percent nationally. Private sector employment earnings corrected for inflation grew by $1,000 compared to $4,300 for the nation.

In contrast Minnesota, the most prosperous Great Lakes State, had job growth from 1990-2011 of 29 percent and private sector employment earnings, corrected for inflation, grew by $7,400.

The driver of Minnesota’s performance compared to Michigan and the country came from knowledge-based services, according to the study. Employment grew in the sector by 60 percent in Minnesota compared to 30 percent in Michigan. Private sector employment earnings corrected for inflation growth in the sector in Minnesota was 43 percent compared to 25 percent in Michigan.

Report co-author Grimes said states such as Minnesota “show the path for Michigan to return to prosperity. The data are clear: The absolute and relative increase in employment earnings per capita in knowledge-based services, which is a combination of strong job and wage rate growth, means that knowledge-based services are now the key to a growing and more prosperous middle-class in America over the long run.”

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