Tuesday, May 24, 2011

US Manufacturing – Global Jack Rabbit?

In my last post (May 17) I made some comments about US manufacturing noting that output of manufacturing companies had grown in the last 10 years. I said I wanted to focus on output for that post and would see how comments might bring up some additional questions.  If US manufacturing output is rising then a couple questions arise. First, how did the US compare to other countries? Second, what are the sources of the output increases?

To answer the first question I found data at the U.S. Bureau of Labor Statistics http://bls.gov/news.release/pdf/prod4.pdf . The second question can be answered many ways but a first step is to recall that that output growth can always be decomposed into two parts – (1) the contribution from labor utilization plus (2) the contribution from the productivity of labor. Luckily the data source at the BLS had information for the years 2000 to 2007 for 19 countries and for manufacturing output, labor hours, and output per hour. Viola.   

The bottom line is that US manufacturing growth stood out when compared with 18 other countries.  The US was in a pack of countries (the Jack Rabbits) that had very high manufacturing output growth. Among those countries the US distinguished itself with respect to the relative contribution of manufacturing productivity growth to manufacturing output growth.  The Muddlers and the Brinkers had slower manufacturing output growth than the Jack Rabbits but in all cases would have done even worse had it not been for productivity growth. That is, productivity growth was important to all 19 countries.

This brings us back to macroeconomic policy. The data show that replacing labor with capital was common among almost all countries from 2000 to 2007. (The BLS also presents data for these countries for the 30-year time period from 1979 to 2009. The story is basically the same – virtually all countries had declines in manufacturing employment that were offset by increased productivity. I focus on the 2000 to 2007 time period to keep things current and simple.)
·        
  • The   US was typical in the sense of having negative annual average growth in labor hours.
  •   It also shows that to attain strong growth in manufacturing output it will take continued strong growth in productivity.
  •   Finally, productivity growth will come only within a business environment that is conducive to investment with sanguine expectations.
Below are the details of the analysis and a presentation of the figures for the 19 countries.  I assign each of these countries to one of three groups with respect to growth: Jack Rabbits, Muddlers, and Brinkers.

How did US manufacturing output fare compared to other countries?
·         US output growth from 2000 to 2007 averaged 2.9% per year – the seventh highest rate among the 19 countries.
·         The rates ranged from 7.4% per year for the Czech Republic to -0.6% for Canada.
·         Notice that the top 8 countries were diverse – high income Nordic countries (Finland, Sweden, and Norway); Asian countries (Taiwan, S. Korea, and Singapore); and finally one Central European transforming nation (the Czech Republic).
·         The slowest growing manufacturing sectors were generally from high income European countries and Canada

% Change in manufacturing output, average annual 2000 to 2007
Czech Rep
7.4
Taiwan
7.2
S. Korea
6.8
Finland
6.1
Singapore
5.5
Sweden
5
USA
2.9
Norway
2.6
Japan
2.3
Germany
2.1
Netherlands
1.9
Australia
1.6
Spain
1.2
France
1.1
Belgium
0.8
Denmark
0.6
Italy
0.3
UK
0
Canada
-0.6

Next we examine how much of this output growth was the result of changes in labor hours, labor productivity, a combination of the hours and productivity.

The results for labor hours are as follows.
·         Singapore was the only country to increase labor hours from 2000 to 2007. Singapore’s strong output rate of 5.5% per year was very much the result of strong employment growth of 3.5% per year. Singapore is the only country among these 19 to generate most of its manufacturing growth through more labor input.
·         The UK and the USA led the 19 countries in labor input reduction with average annual decreases of 3.9% and 3.1% respectively. Other rich nations had similar patterns – Denmark, France, the Netherlands, Canada, and so on.

% Change in labor hours, average annual 2000 to 2007
UK
-3.9
USA
-3.1
Denmark
-2.4
France
-2.0
Netherlands
-1.7
Canada
-1.4
Japan
-1.4
Sweden
-1.4
Germany
-1.3
Belgium
-1.2
S. Korea
-1.1
Australia
-0.8
Finland
-0.7
Spain
-0.6
Taiwan
-0.4
Norway
-0.3
Italy
-0.1
Czech Rep
0.0
Singapore
3.5


Productivity growth helps explain the ability of countries to grow their manufacturing output despite these reductions in employment hours.
·         South Korea led this group of 19 countries with productivity growing of almost 8% per year.
·         US productivity growth averaged 6% per year.
·         S. Korea was followed by Taiwan, the Czech Republic, Finland, Sweden, and the USA
·         Countries with the slowest productivity growth were Italy, Canada, and Spain.

% Change in manufacturing productivity, average annual 2000 to 2007
S. Korea
7.9
Taiwan
7.6
Czech Rep
7.4
Finland
6.8
Sweden
6.4
USA
6.2
UK
3.9
Japan
3.7
Netherlands
3.6
Germany
3.4
France
3.1
Denmark
3.0
Norway
2.9
Australia
2.4
Belgium
2.0
Singapore
2.0
Spain
1.8
Canada
0.8
Italy
0.4

Below is a summary of the key points.
Because employment was shrinking in all countries except two, productivity is the key explanation for output growth.

Singapore is unusual because it had strong growth in employment – thus employment growth (3.5% per year) explained a great deal of that country’s growth of 5.5% per year.

The Jack Rabbits: Several countries with strong output growth had stellar productivity growth as the source of their manufacturing expansions – Sweden, South Korea, Taiwan, Norway, Finland and the Czech Republic

The US leads the Jack Rabbits – This group had strong productivity growth behind very strong output growth The US leads that group by virtue of the percentage contribution of productivity to output growth. In the US the productivity contribution of 6% per year was double the output growth of approximately 4% per year.  Several countries had stronger output growth than the US. Others had stronger productivity growth. But the US contribution of productivity to output deserves recognition.

Brinkers on the Edge – Canada, UK, Italy, France, Belgium, and Denmark were countries with very slow or negative manufacturing output growth. Without the productivity changes the labor reductions would have led to declines or larger declines in output.

Muddlers – had average to below-average manufacturing growth sparked by just enough productivity growth to offset the negative impacts of labor growth on output. Muddlers include the Netherlands, Germany, Japan, Spain, and Australia

In all three groups productivity was the key to manufacturing growth. Productivity is costly and requires significant investment. Investment requires financial markets that efficiently channel the supply of national savings to risk-taking firms. Some governments may use industrial policy to pick winners and funnel or incent financial flows to the chosen few but such policies have been shown to be risky and often wasteful. What is not controversial is that all business firms must have the freedom, flexibility, ability, and desire to take considerable risks. Congress and the President need to take that to heart.

7 comments:

  1. Singapore is quite a surprise! Perhaps there's an impending Asia-wide shortage of chopsticks. I've been there, and it one of the cleanest cities on earth if not the cleanest, but I'm at a loss as to what it produces. Perhaps canes to use in administering public misdemeanor punishment. Considering the impact of unionized labor, I'm surprised that the UK isn't one of the Muddlers along with Australia. I'm also amazed that the Netherlands is a Muddler and not a "Hans" Brinker. Maybe the clouds of weed smoke wafting about cause a national WTH attitude.

    As indicated by the Jack Rabbits, technological advances in manufacturing have obviously contributed to increases in productivity with decreases in labor hours and costs. I wonder why many of the more advanced EuroZone countries haven't shown the same trend? Could it be the effect of over-reaching union influence in the governments? Consider that the average work week in France is around 30 hours for probably a 40-hour pay equivalent. I'm guessing that in an environment like that, technology wouldn't be allowed to have a positive impact.

    Per Charles' comments on your last post, do the data reflect small as well as large manufacturing segments?

    Obviously, I had little-to-no valuable input on this post, but I felt compelled to contribute, anyway.

    ReplyDelete
  2. Crash,

    The data includes all manufacturing companies large and small.

    Why the different experiences of different countries -- that's a tall order. It would be too easy to generalize so I won't because I would probably be wrong. The EU is thought to be less flexible because of institutional rigidities that go well beyond labor. For example it takes a long time and it is very expensive to start a company in the EU. But notice that among the EU countries there is a lot of difference. As for Singapore, here is a link to an article that discusses its industrial structure -- clearly more than chop sticks! http://www.guidemesingapore.com/blog-post/singapore-life/major-industries-in-singapore

    ReplyDelete
  3. Manufacturing jobs pay more than service jobs with exception of the executives or Wall Street Banks. Yes manufacturing jobs have contracted per company due to the advent of automation and computers/digital technology. My company accomplishes today with 4.5 people what we needed 10 for 5 years ago with the same amount of business. In fact we can expand by a factor of 3 and only need 2 more people. My point is this….. Because the jobs have shifted to the lesser paying service industry and wages have remained stagnant….credit. equity financing or both are need to sustain a standard of living. If, on the other hand there are more manufacturers …even though they are efficient…there will more people employed in manufacturing and more spending based on earned income and not credit. The ratio of service to manufacturing in terms of earned income contribution will reach an equilibrium.

    Short version: The out of work or under employed people from the building bubble have to find jobs that paid the same of more to be able to contribute to the GDP for it to grow above 3%. This includes affordability of all of the things the US needs to compete…good schools….healthy people…good resources and maximizing the deployment of the resources..including people….and we will not need to raise taxes or cut valuable programs to reduce the deficit.

    More Direct Version: By creating an environment to maximize the US ‘s human, technical and material resource contribution to the GDP we can solve many of the issue politicians seem to struggle with .

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  4. James,

    I agree that more manufacturing output will be good and that it will lead to more good jobs and employment -- perhaps not as much employment as before but nevertheless it is good to have a growing manufacturing sector. But your point about credit is debatable. When Otis Elevator sells you an elevator is makes less money than when it sells you the maintenance contract that goes with it. Both activities of Otis Elevator need financing -- manufacturing and services. I see no reason why a switch to services implies a movement away from earned income to financing.

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  5. Thanks to John Manzella of Manzella Trade Communications, Inc -- for pointing out two things to me today about the data. First, the data the US uses for international comparisons is different from that usually published for productivity. In the case of my post, the productivity figure for the US is higher than the published figure used for domestic purposes. Second, I made a typo when I listed US productivity growth as 6.0% -- I should have typed 6.2%. I edited the post today to reflect the correct number. In either case, the main points of my posting are not affected.

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  6. If you buy an Otis elevator and don't buy the maintenance agreement with it, will you get shafted?

    ReplyDelete
  7. Crash,

    I don't know but you will definitely get a lift.

    ReplyDelete