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U.S. Manufacturing--The Rise of the Middle Way

The decline of U.S. manufacturing is a familiar story. According to government statistics, U.S. manufacturing reached its employment peak in 1979, with 19.4 million workers. In 2010, the number was just 11.5 million. The share of all workers in manufacturing has declined from 23 percent in 1970 to 9 percent in 2010. This is generally taken to be a sign that the United States has lost its competitive edge in manufacturing, because low-cost developing countries can afford to pay their workers much less for highly routine work.

Less noticed, however, is the trend towards small and medium-scale manufacturing. In 1980, 50 percent of U.S. manufacturing jobs were in huge firms with 5000 or more employees. After decades of steady decline, that share fell to 35 percent by 2009. Likewise, the share of the sector’s jobs in small firms, with less than 500 employees, increased from 33 percent in 1980 to 41 percent in 2009.

A similar trend can be observed at the establishment level—that is a firm’s single physical location. The share of jobs in establishments with less than 100 employees has increased from 46 percent to 53 percent from 1992 to 2008. Over that period, the number of jobs in manufacturing establishments with fewer than 10 employees actually increased (see Your Economy). This suggests that US manufacturing, as with Germany’s famed Mittlestands, might be able to succeed in small and medium doses.

One possible explanation for these facts is that the United States, and similar countries, retain a comparative advantage in early to medium-stage production and product development, when networks, human capital, and monitoring are most important, but once the products are commodified and ready for global markets, the price of labor become a key factor, and many of the jobs go abroad, curtailing employment size.

If the above explanation is correct, then one would expect to see a high percentage of new firms—in earlier stages of development—located in clusters and metropolitan areas. Off-shoring would be limited to mature firms with commodity products.

There is some evidence that this trend is playing out in the clean economy. As we discussed in a previous post, 54 out of 58 US firms in the Global Cleantech 100 have headquarters in one of the 100 largest metropolitan areas, and yet, over half of these firms are manufacturers. This is also consistent with a policy movement aimed at recognizing and nurturing bringing back manufacturing to cities (see this Brookings-Pratt collaboration).

Moreover, these cutting-edge cleantech firms are much smaller and younger than the average establishment. The 47 global cleantech firms in the Brookings clean economy database--a work in progress--have an average size of 75 workers; the average start year of the Global Cleantech establishments is 2004, compared to a national average of roughly 1997.

In contrast to these newer firms, a large mature U.S. solar manufacturing firm--First Solar, which was founded in 1992--has already opened up 16 production lines in Malaysia, compared to 3 in the United States. In its 2009 annual report, it claims to have 4700 employees, and so it already approaching a very large size. The decision to go to Malaysia seems to have been motivated in part by a 16-year tax holiday (on top of a corporate tax rate that was already 10 percentage points lower), but more importantly perhaps, the average wages for a manufacturing employee in the relevant electronics industry are less than one tenth the wages of their U.S. counterparts.

If First Solar is any indication, the window of large-scale job creation for U.S. manufacturing may be short before at least some production lines go overseas. Clearly, policy can help here. Public efforts should focus on making sure manufacturing firms have sufficient access to finance, skilled labor, land, and clusters to both prolong and deepen their investments in the United States. It might be inevitable that some of their jobs go overseas, but the country can still benefit greatly from hosting the early and medium stages of firm development, as well as retaining a home base.