From factories to knowledge-based

Our work at Michigan Future is focused on understanding the changes occurring in the American economy largely due to globalization and technology and how to be successful in that economy. Our interest is in the long term structural changes in the economy, rather than year to year (or even shorter term) largely cyclical changes.

For our upcoming annual report Don Grimes and I have been looking at what has happened to the American economy over the last two decades. From 1990-2001 and from 2001-2011. The headline is the dramatic shift from a factory-based to a knowledge-based economy. And, more importantly, the defining characteristic of the places with the most prosperous economy is their concentration in the knowledge-based sectors of the economy. Except for those few states with lots of oil and natural gas.

Here are the data:

From 1990 to 2011 manufacturing employment fell by 5,778,000 a decline of 32 percent. Nationally the share of workers in manufacturing fell from 13 to 7 percent. In terms of employment earnings (both wages and employer paid benefits) per capita from manufacturing corrected for inflation the decline was 29 percent. The share of private sector employment earnings per capita from manufacturing fell from 21 to 12 percent.

The absolute and relative decline of manufacturing occurred during the nineties boom as well as the anemic American economy of the last decade. From 1990-2001 manufacturing employment fell by 1.2 million, a decline of 7 percent. Manufacturing employment earnings per capita corrected for inflation experienced a slight decline. The sector’s share of private sector employment earnings per capita fell from 21 to 16 percent.

Manufacturing is experiencing a long term structural decline that almost certainly is irreversible. The sector no longer is the source of mass middle class jobs –– both because wages and benefits no longer carry the premium they did decades ago compared to the rest of the economy and the sector employs a far smaller proportion of the American economy.

As work done in factories has declined what has grown are services. Both in absolute and relative terms. Particularly what we call knowledge-based services. Those sectors are health care and social assistance; information; finance and insurance; professional services; and management of companies. Its worth repeating –– as we do often –- that the pre and post production work of manufacturing enterprises (engineering, design, logistics, marketing, management, etc.) are part of knowledge-based services.

Employment in knowledge-based services grew by 9,436,000 from 1990 to 2011. An increase of 32 percent. Those sectors’ share of American employment grew from 21 to 26 percent. In terms of employment earnings per capita corrected for inflation, the knowledge-based service sectors growth was 53 percent. The share of private sector employment earnings per capita from knowledge-based services grew from 33 to 42 percent.

The absolute and relative increase in employment earnings per capita from knowledge-based services is a combination of strong job growth and those sectors are now the high wage sectors of the American economy. Knowledge-based services now are the center of mass middle class American jobs.

The lesson is clear –– although the country and most states and regions –– certainly including Michigan –– and their elected representatives on a bi-partisan basis are having a hard time accepting it –– 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 or any other sectors of the economy (once again accept for energy related natural resources).

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