SEEKING RHODE ISLAND'S NICHE AS MANUFACTURING SLIPS

The Providence Journal Editorial Page, April, 1997

Rhode Islanders seem to spend an inordinate amount of time debating whether manufacturing is dead or alive, how bad the current situation is, how much farther down we have to go, or how far below its level at the 1989 business cycle peak our manufacturing employment base fallen. The recent report by the Economic Policy Council also discusses manufacturing in detail. As a person who has spent a great deal of time studying this topic, let me take this opportunity to detail some of the more important aspects of what we currently do and don't know.

• Rhode Island is no longer a manufacturing-based economy. In late 1987, Rhode Island made the transition from being a manufacturing-based economy to one driven by information and services. At that time, Rhode Island joined the "information age" as it is called. This ushered in a host of structural changes, often negatives, that have continued to offset the business cycle positives we have experienced throughout this entire recovery (which began in January, 1992).
• Nobody knows how much manufacturing employment in Rhode Island actually is. Services have become increasingly important to our economy. Ironically, some manufacturing employees, those employed by temporary employment agencies, are classified in the employment category "Miscellaneous Services." Since we don't know the actual number of workers in this category, we cannot know the exact number of manufacturing employees in Rhode Island.
• Manufacturing employment for Rhode Island peaked far earlier than did payroll employment. Manufacturing employment peaked in 1984, some five years prior to payroll employment reaching its most recent peak in June of 1989, which ushered in our last recession. It has been falling every year since then. So, whether the overall Rhode Island economy is in recovery or recession, any discussion of manufacturing employment performance has focused on rates of decrease.
• To detail the extent of job loss in manufacturing, don't compare the current month's employment figure to the 1984 peak. As stated above, we don't really know the actual employment figures for different time periods, so detailing this job loss is error prone. Also, there is a potential problem with "seasonality," which makes it invalid to compare employment levels for different months. Unless you use seasonally-adjusted data, don't compare to either January or July, since employment is so much lower than average during these months.
• The monthly or yearly change in manufacturing does not indicate the number of jobs gained or lost for that period. Overall, the monthly or yearly employment change denotes the difference between the number of jobs created and the amount lost. A negative change therefore indicates that more jobs were lost than created, not that no jobs were created. Much of our manufacturing employment loss can be accounted for by defense-related cuts, especially in "Transportation Equipment," which includes Electric Boat, and "Instruments" of which Raytheon is part. The other "negative" has been Jewelry, which continues to drop significantly. For March of 1997, manufacturing employment fell 2,400 from its value last March, as 1,200 jobs were created while 3,600 were lost. If we eliminate the declines for the two defense-related industries mentioned above and Jewelry, overall manufacturing employment would have fallen by only 600.
• Our falling manufacturing employment does not necessarily indicate that manufacturing output is declining. For individual firms, survival requires continual increases in productivity, which allow production costs to fall. While employment declines as firms incorporate labor-saving technology into production, output for these firms rises. Problems occur when firms leave this state. Then, both employment and output decline. At the economy-wide level, manufacturing output has been falling for some time, but at rates well below the declines in employment. This combination has resulted in rising manufacturing productivity. Unfortunately for Rhode Island, manufacturing productivity has lagged both the levels and growth rates for the nation, something our relatively low wages must then make up for to give us comparable "unit labor costs."
• Manufacturing employment might or might not be declining, depending on whether you look beyond the dated "SIC" classifications. If we examine manufacturing employment as a whole, then, clearly employment continues to decline. If, however, we acknowledge the fact that it is possible to manufacture "services," such as computer processing, then the total number of jobs, counting both traditional manufacturing plus Business Services, or "Manufacturing of Goods and Services" has been rising for a number of years. Thus, the job gains from the SIC category "Business Services" continue to largely offset the losses from the existing manufacturing category.
• Not all job loss in manufacturing results from firms leaving our state due to problems with the cost of doing business here. Some firms have left Rhode Island to move production closer to their markets. More have left due to consolidations related to corporate mergers and restructuring (Fram, Superior Health Care). In other words, some of our manufacturing loss has occurred for reasons beyond our control. The "good news," assuming that misery loves company, is that Rhode Island is not the only state experiencing this.
• To maintain a stable or increasing manufacturing employment base, it is no longer enough to maintain roughly the same number of manufacturing firms here. In the "good old days" this might have been true. Today, as firms continue to incorporate labor-saving technology into production, existing firms will tend to employ fewer workers unless they expand the scope of their operations here. The prerequisites for a stable manufacturing base today, which is not good news for Rhode Island, are expansion by existing firms and the location of new firms here.
• We should rethink whether we want to make our economic climate for manufacturing more like that of the southern states we compete against. While we continue in our attempts to make our economic climate more hospitable to manufacturing, closer to what the southern states offer, this does not necessarily hold the promise of rising manufacturing employment. For 1996, Rhode Island's manufacturing employment fell by 2.9 percent. Is the grass greener on the other side when it comes to manufacturing? The average percent change in manufacturing employment for the US in 1996 was -1.0%, neither cause for celebration nor something to strive for on a long-term basis. Consider the 1996 changes for three of the states we so often compete with: North Carolina -2.0%; South Carolina -3.1%; Virginia -1.1%.

Just as a firm must size up its strengths and weaknesses, determine what it can do well, and decide how to deliver a product that is differentiated from its competitors, in other words, to determine its niche, Rhode Island must now determine what its manufacturing niche is to be. To do this, our business, government and education sectors will need to continue working together to define what we wish the "brass ring" at the end of this process to be. If our primary interest lies in emulating the success of the southern states we compete with in manufacturing, then, as the 1996 employment figures show, we should be careful what we wish for; we just might get it.

by Leonard Lardaro