Tuesday, March 18, 2008

Manufacturing Our Future

One of the most counterproductive myths in the Pittsburgh Region is that manufacturing is dead and gone, or at best on life support, waiting for the last job to move overseas.

Nothing could be further from the truth. Manufacturing is actually the largest economic sector in our region. More than one out of every seven dollars (15%) of employment earnings in the Pittsburgh Region comes from manufacturing jobs.


Moreover, we are one of the leading manufacturing regions in the country. We have the 8th highest percentage of regional income from manufacturing among the top 40 regions in the U.S.


And perhaps even more surprisingly, manufacturing is becoming a bigger part of our economy, not smaller. Manufacturing’s contribution to our region’s income has increased in recent years, whereas it’s been decreasing in most regions.


If you don’t believe the numbers, read the headlines. Medical device manufacturer Medrad just opened a new headquarters and a new manufacturing plant. Westinghouse is building a new headquarters and adding thousands of jobs to develop new nuclear energy plants. U.S. Steel is planning to invest $1 billion in new pollution control equipment. Wheelabrator, a leading pollution control equipment manufacturer, just announced it’s going to create over 500 new jobs. The list goes on and on.

It’s true that there are far fewer manufacturing jobs here today than in the past – over 160,000 fewer than 30 years ago. 100,000 of those jobs were lost in just five years (1980-1985) when the steel industry collapsed. Since then, there have been continued reductions as the most labor-intensive manufacturers have moved to the Sunbelt or to Asia to take advantage of lower wages, and as the remaining manufacturers have pushed for greater productivity. But many highly skilled manufacturing jobs have remained here, and the high skills translate into high wages. The nearly 100,000 manufacturing jobs in our region today have the 8th highest average earnings among the top 40 regions.

But doesn’t the loss of manufacturing jobs mean Pittsburgh is now primarily a “service economy?’ While it’s certainly true that the majority of jobs here today are in the service sector, that’s nothing new – even in 1970, two-thirds of all of our jobs were in the service sector. Moreover, the majority of jobs in every region today are in the service sector.

What’s important to recognize is how many of our service sector jobs are directly dependent on manufacturing businesses. The headquarters and R&D jobs in our major manufacturing companies like Alcoa, Allegheny Technologies, Bayer, PPG, and U.S. Steel are now counted in the service sector, not as “manufacturing.” Whereas in the past, manufacturing firms employed everybody, including their lawyers, accountants, engineers, and janitors, now they contract out most of those functions to law firms, accounting firms, engineering firms, janitorial companies, and others in the service sectors. And a lot of health care, retail, arts, government and other jobs in the region depend on the spending by manufacturing businesses and their employees.

In fact, economists estimate that, on average, every manufacturing job results in 2-3 additional jobs in the region (through what is known as the “multiplier effect”). That means that manufacturing directly or indirectly supports about 1/4 of all the jobs in the region. And because manufacturers sell their products around the world, they bring “other people’s money” here to support our economy.

We need to pay special attention to manufacturing, not just because it’s the biggest piece of our economy, but because manufacturers are some of the most mobile of our employers. Retail stores, hospitals, and many other service firms are dependent on the local economy, and so they are unlikely to pick up and move. But most manufacturers compete in national and international markets, and they can and will pick up and move if it will make them more competitive. And if a manufacturer leaves, the multiplier means it will have an enormous ripple effect throughout the rest of our economy.

Can we continue to be a manufacturing region in the future? Yes, but only if we take the steps needed to be attractive for manufacturing businesses. Four strategies are key:

1. Reduce Business Costs.

Manufacturers compete on both the costs and quality of their products, so we need to make sure the costs of doing business here – taxes, energy, health care, regulations, etc. – are competitive with other regions.

Unfortunately, Pennsylvania has the worst corporate taxes in America, which significantly increases costs for manufacturers here. The second highest corporate tax rate of any state, a cap on net operating loss carryforwards, and an increasingly uncompetitive apportionment formula all combine to create a big red Stop sign for manufacturing growth.

More and more, the high cost of health care is what’s worrying manufacturers. Health care is a regional enterprise, and the region that figures out how to eliminate the estimated 30-40% waste and inefficiency that exist in most health care systems, and then translate that into lower health insurance costs, will be a magnet for business growth. Pittsburgh could be that region, but it’s not today.

2. Improve the Quality of Education.

Many manufacturers complain that they cannot find qualified workers to fill their jobs. It’s no wonder – 30-40% of our region’s young people graduate from high school unable to read or do math properly. In contrast to the past, most of today’s production workers need brains, not brawn. The region that figures out how to make each of its high school graduates proficient in reading and mathematics will be a magnet for business growth. Pittsburgh could be that region, but it’s not today. (And contrary to popular belief, it doesn’t require higher school spending.)

3. Encourage Innovation and Entrepreneurship.

Most of our largest manufacturing firms – Alcoa, Allegheny Technologies, Kennametal, Medrad, Mine Safety Appliances, PPG, Respironics, U.S. Steel, Westinghouse, and many others – didn’t move here from other places; they were started here by entrepreneurs. If we want more manufacturing companies and jobs, the best way to get them is not to lure them from other regions, but to grow them right here at home. That means supporting innovation in our existing firms and encouraging new startup firms in fields ranging from life sciences and robotics to clean energy and advanced materials.

Unfortunately, despite having an enormous pool of creative talent at our universities and R&D centers, we have one of the lowest rates of startup firms of any region in the nation, both in manufacturing and every other sector. That has to change if our region is going to grow. We need to encourage entrepreneurs and help them easily connect to customers and sources of capital so that they can create the jobs of the future.

4. Maintain and Improve Our High Quality of Life.

And finally, it’s undeniable that the entrepreneurs and skilled workers in manufacturing and other high-wage sectors want to live in regions with a high quality of life. As Pittsburgh’s “Most Livable” ranking demonstrates, we already are such a region today. But we still need to work hard to maintain and improve our quality of life, lest other regions catch up and surpass us.

Manufacturing is not only our past, it’s a big part of our present, and it needs to be a major part of our future. If we make manufacturing successful here, it will help all parts of our economy to grow.

3 Comments:

Blogger Jared McLaughlin said...

Good post. I decided to get into a career in manufacturing for a variety of reasons, but I was surprised by how much economic activity there is in Pittsburgh's manufacturing industry. A fast, but not scientific way of showing how much more manufacturing is occuring here as opposed to other regions is to look at the amount of jobs in those fields listed on websites like craiglist. I can't find another city in the US with as many openings, paying substantial wages, as there are in Pittsburgh.

One of the problems I've noticed as a new guy in the field is that it's being powered by a generation of people who all be retired in the next decade. One of the things that will start to hurt manufacturing here will be the lack of new employees to fill their places. It takes several years to become proficient at many of these trades. If we can't find a way to promote these trades to young people it will become a self-fulfilling prophecy; they will believe there are no good jobs in manufacturing, and the manufacturers faced with the prospect of no one to run the machines will either have to move or close their doors resulting in no good jobs in manufacturing.

12:40 PM  
Anonymous Raj C. said...

As with the rest of the country the economy has changed. Cities like Dayton, Toledo, and Cleveland-cities with similar economic profile- took big hits when manufacturing jobs left the U.S. Pittsburgh's 15 percent decline in goods-producing employment between January 1999 and the end of last year was considerably higher than the 9 percent drop recorded in the nation as a whole. However, Pittsburgh was more nimble and adjusted by adding jobs in health care, medical research skilled manual labor. Home prices have also staid relatively affordable, all which make it a very livable city.

10:31 PM  
Anonymous raj C. said...

As with the rest of the country the economy has changed. Cities like Dayton, Toledo, and Cleveland-cities with similar economic profile- took big hits when manufacturing jobs left the U.S. Pittsburgh's 15 percent decline in goods-producing employment between January 1999 and the end of last year was considerably higher than the 9 percent drop recorded in the nation as a whole. However, Pittsburgh was more nimble and adjusted by adding jobs in health care, medical research skilled manual labor. Home prices have also staid relatively affordable, all which make it a very livable city.

10:35 PM  

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