So you think manufacturing productivity is way up, do you? Think again.
Every genius from those employed by the government to the academic community to the professional economists talks big about the radical improvement in manufacturing productivity. Bring up the fact that manufacturing jobs are disappearing so fast that factory workers should be on the Endangered Species List, and you will hear about productivity.
Said Business Week in The Case of the Missing Jobs, "What’s going on here? Why is manufacturing employment, at 14.2 million workers, at its lowest level in more than 50 years while manufacturing output is at an all-time high?" They pooh-pooh outsourcing as an explanation and state, "Since 2001, with the aid of computers, telecommunications advances, and ever more efficient plant operations, U.S. manufacturing productivity, or the amount of goods or services a worker produces in an hour, has soared a dizzying 24%. That’s 72% faster than the average productivity advance during America’s four most recent recession-recovery cycles dating back to the 1970s. In short: We’re making more stuff with fewer people."
That would be great news, if it were true, but it is not even close to reality. Here is an interesting bit of jibberish from the bowels of the Bureau of Labor Statistics, the generators of the "dizzying 24%" productivity increase Business Week gushes over:
"Conceptually, the impact of offshoring is more pronounced in manufacturing measures than in the business sector measures, provided the domestic manufacturer is purchasing the offshored goods or services as inputs. (As with the business sector, the complete loss of manufacturing production to an importer of finished goods leaves productivity largely unchanged.) If a domestic computer manufacturer switches from domestic to foreign suppliers of intermediate inputs such as computer memory chips or call center services, real manufacturing sectoral output is unchanged. Because U.S. jobs are lost (all other things unchanged), labor productivity will rise. If the U.S. manufacturer switches most of its production to off-shore facilities, labor productivity might rise substantially."
Most people will read that and immediately react with a resounding, "Huh?" Heaven forbid that our government ever tell us anything understandable. Let me translate for you, after having gone through it and the rest of the report a bunch of times.
When they calculate productivity and publish these grand statistics, they basically take the output from manufacturing divided by the labor. (Output is a complicated formula, but if you think of it as the profit from manufacturing, you’ll have the gist of the logic. Purists will jump all over me for that gross simplification, but that’s a good way to envision what they do.) The output represents the ‘value add’, or what the labor created. If a company lays off half its people, keeping only the final assembly folks, and starts buying all of the parts the laid off people used to make from China or Mexico, the output would stay the same – or even go up – but the labor would be cut in half. According to the Bureau of Labor Statistics, NAM, Business Week, and every smart guy east of the Allegheny Mountains, that means manufacturing productivity just doubled. Same output with half the labor.
The BLS rationalization: Yeah, but if the whole plant moves to China we take it out of the arithmetic because that means they are an importer instead of a manufacturer. Gee, thanks. From my observations, not many companies are sending the whole factory overseas – they are more likely to be replacing the core manufacturing with offshore components, turning themselves into final assemblers only.
I am no math whiz, but replacing two American workers with one American and a Chinese guy does not double the level of productivity. It just sends an American worker down a new career path at the Sears Lawn and Garden Center, or peddling life insurance, while the Chinese guy moves his family across town to a better grade shack. In fact, globally, true productivity probably went down since it is apt to take two or three Chinese guys to replace the American worker.
Jerry Jasinowski, head of NAM’s research and education work, says, "One bright ray of light is U.S. manufacturing’s tremendous productivity gains. U.S. manufacturing productivity has surged 24% since the last recession … Strong productivity growth helps America compete in the global economy and is the key to higher wages and better living standards for U.S. workers." NAM, of course, is the most ardent defender of outsourcing the manufacturing world has.
Either Jerry reads Business Week, or he skipped the fine print in the BLS report where it says the productivity improvement includes a fair amount of hammering down the wages and living standards of U.S. workers.
Mr. David Huether, the author whose Business Week article told NAM and the manufacturing outsourcers what they want to hear, also noted the soaring U.S. trade deficit. We are buying a whole lot more from other countries than we are selling. You would think that a bright guy like a Business Week writer would see a connection. Deficits soaring as we are bringing more and more in from elsewhere … and productivity growth shattering all previous productivity growth records … hmmm …. I wonder if there could be a connection, Dave?
It never occured to Mr. Huether, however, because he in fact works for NAM as their Chief Economist – not Business Week. I guess Business Week has forsaken objectivity and turned their editorial pages over to the manufacturing outsourcing lobby. Keep that in mind the next time you look to them for business news.
Dave – you asked, "What’s going on here? Why is manufacturing employment, at 14.2 million workers, at its lowest level in more than 50 years while manufacturing output is at an all-time high?" I’ll tell you. What’s going on here is that, instead of becoming leaner, more productive manufacturers, we are laying everybody off and shipping the work to China. Just read the report, buddy.
Note: Outsourcing also has a ‘Darwinian effect’ on artificially inflating productivity numbers. The more poorly managed a manufacturing operation is, the less profitable it is, the more likely it is to be outsourced. Inversely, better managed plants are more profitable, more productive and less likely to be outsourced. As the least productive manufacturing operations leave the U.S., even though the remaining plants may be no more or less productive than they were before, the numbers reflect a productivity increase.
For example, when Delphi closes 21 American plants, but Toyota stays the same, it will look as if American productivity shot up. On average, that may be true, but averages are not always accurate measures of things. If you have your head in the freezer and your feet in the oven, you should feel pretty good, on average. The truth is that America will be creating less wealth, fewer jobs and will be even more dependent on foreign manufacturing.
The popular notion is that American manufacturing is still very healthy because advanced technologies and the wonders of the information age have created productivity gains that more than offset the loss due to outsourcing. There is not a shred of empirical data to support that notion. It is, in fact, hogwash.
There is no economic substitute for good manufacturing management – and that means lean manufacturing.