I am often asked some version of the question, "Can we really survive becoming a huge service economy; won't our loss of manufacturing jobs spell doom for our country?" The answer is, “No.” If we face doom, it is mostly short-term and not a product of our industrial change. Here's why.
First, we are and always will be a manufacturing nation. It's just that we will continue to grow our manufacturing production with a smaller share of workers. This is exactly what happened to the Midwest a century ago when some bright soul attached an internal combustion engine to a plow, leading to the loss of millions of good agriculture jobs. In truth, the excess supply of workers from that period made the Midwest fertile for manufacturing growth. The young men who found themselves unable to make a living on family farms were perfectly suited to the manufacturing age of the 20th century. Equipped with eighth-grade educations that guaranteed literacy and numeracy, these workers were accustomed to solving problems, tinkering with a hit-and-miss engine and unafraid of hard work. They were perfect workers for manufacturing.
Even today manufacturing thrives. This year will set the record for manufacturing production in the U.S., replacing 2012 as the record year. The story of machinery, management and productivity growth tells an important story about where we are as an economy and where we might be heading. In 1970, the average manufacturing worker produced about $60,000 of goods in today's inflation-adjusted dollars. In 2012, that number topped $190,000 of goods per worker. So, what took three factory workers to make 40 years ago is now produced by one.
Wages for manufacturing workers have risen – these are prized jobs – but they haven't risen as fast as productivity. The reason for this is simply that much of the growth in worker output isn't due to more skilled workers but to better machinery and better managed production processes. So, the benefits of productivity gains go to paying for capital and hiring more talented management. Still, over time, the workforce and the way they are compensated will change. As an increasing share of labor costs are allocated to taxes and health care, there will be a downward pressure on take-home pay. At the same time, there is pressure from the accountants to attract better workers. The simple reason is that the machinery required for production requires different skills now than in 1970.
Moreover, those skills decay more quickly (as anyone who uses computers can attest). Also, with fewer workers on the shop floor, mistakes and absenteeism are more costly. So, manufacturers are looking for healthy people who can learn computer skills and relearn the software and processes every few years for the rest of their lives.
Whether or not economic change is for good or ill is solely a result of how we adjust, not the change itself. We can do well with the changes to manufacturing. It only requires the same adaptability we enjoyed in the last century.