New report lessons

Interesting reaction to our new report. Nearly everyone wants to talk about what it means to policy. And yet for Don Grimes and I the important lessons in the report is about the economy, not policy.

Policy should be about what levers get you to where you are trying to go. And what the report says is that if your goal, as Governor Snyder has stated, is more and better jobs, the only realistic path to that goal is through being concentrated in knowledge-based services, not manufacturing. Or for that matter any other sectors. (Always with the oil and natural gas exception.)

The report doesn’t mention policy at all. It is exclusively about how the American economy has been transformed from 1990-2011–largely, we believe, due to globalization and technology. And how Michigan and Minnesota (the Great Lakes most prosperous state) have fared compared to the nation over those two decades. The facts are:

  • 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 to 7 percent.
  • In contrast employment in knowledge-based services grew by nearly 16.5 million an increase of 55 percent. Knowledge-based services share of American employment grew from 21 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.

So the lesson we need to learn first and foremost is: 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 (private health care and social services; finance and insurance; information; professional services; and management of companies), not factories.

Minnesota has done substantially better than the country  since 1990 primarily because of their concentration in knowledge-based services. Michigan worse than the country because of our under concentration in those industries. Employment grew in knowledge-based services 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 74 percent compared to 33 percent in Michigan.

Despite all the evidence to the contrary, on a bi-partisan basis, most Michigan political and economic leaders have made a revival of manufacturing the key to more and better jobs. We don’t think that is possible no matter what policy regime you implement. Bad policy is not the reason manufacturing employment and wages and benefits have fallen in both absolute and, even more, relative terms over the past two decades. No policy can overcome machines doing more and more of the work in factories or manufacturing jobs being done across the planet rather than primarily in the U.S.

The first lesson Michigan needs to learn is one about vision.Where do we want to go from here. If the goal is more and better jobs/a place with a broad middle class our vision needs to be becoming knowledge-based. Once we are on that path then it will be time to debate what are the policies that can help get us there.

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