G. Andrew Bemat, Jr,
Manufacturing Restructuring and Rural Economies Job Growth but Lagging Wages
Many nonmetro areas gained manufacturing jobs during the 1980's, while metro areas lost manufacturing jobs. The nonmetro gain, however, was accompanied by wages that fell further below metro wages. Two factors contributing to the deterioration in rela- tive wages were the continuing concentration of nonproduction labor in metro areas and slower labor productivity growth in non- metro manufacturing.
"p, ^ ANUFACTURING industries throughout the world etc.) relative to the number of production or assembly-line I % / I are undergoing fundamental changes that may workers, greater demand for flexible labor practices, X W MJhave profound effects on the number and types greater reliance on timely information about markets and of manufacturing jobs in rural communities. Because of technology, and closer coordination and cooperation manufacturing's pivotal role in the nonnietro economy, among machine makers, component producers, and prod- the changes associated with this restructuring will help uct assemblers. shape the course of rural economic development. Some nonmetro commimities will benefit from this so-called These changes in production have already affected the "new manufacturing/' but as lagging wages and lagging location and characteristics of many manufacturing indus- labor productivity imply, many rural areas may find it dif- tries. From a rural development perspective, two of the ficult to retain their competitiveness. most significant effects of these changes are growth in manufacturing jobs in less urbanized and completely The Changing Structure of Manufacturing rural nonmetro counties and the growing gap between One of the most important aspects of the ongoing restruc- nonmetro and metro manufacturing wages. The shift in turing within many manufacturing industries is the adop- manufacturing jobs to nonmetro areas may be viewed as a tion of more flexible processes in both the technologies positive trend, but the increasing disparity in wages and the organizational structures used to produce goods. appears to reflect a fundamental deterioration in the com- Driven in part by heightened global competition but also petitive position of nonmetro economies. Two indications by rapidly advancing technology, many manufacturing of such a deterioration are shifts in the occupational struc- industries are changing their processes to allow faster ture of manufacturing and lagging labor productivity product development, shorter production runs, and pro- growth in nonmetro manufacturing, both of which con- duction of a greater variety of products at a single facility tributed to the fall in relative wages. or machine. Manufacturing Shifts Into Nonmetro Areas The trend towards greater flexibility has a number of Almost all job growth in U.S. manufacturing since 1969 implications for the structure of manufacturing firms and has been in nonmetro areas (table 1). During the 1970's, establishments, and that structure in turn has implications 544,000 manufacturing jobs (half the total U.S. increase) for the spatial distribution of manufacturing. In general, were added in less urbanized nonmetro coimties (non- the adoption of flexible production practices leads to metro counties with a total urban population between smaller factories or establishments, more nonproduction 2,500 and 20,000) and completely rural counties (non- workers (administrators, engineers, marketing specialists. metro counties with no urban population). This 23-per- cent increase compares with an increase of only 10 percent (165,000 jobs) in urbanized nonmetro counties (nonmetro G. Andrew Bernât is an economist with the Rural Economy Division, ERS. counties with an urban population of more than 20,000).
Rural Development Perspectives, vol. 9, no. 3 Table 1 Manufacturing also shifted to nonmetro areas because Change in manufacturing jobs nonmetro areas lost smaller proportions of jobs in declin- Less urbanized and totally rural nonmetro counties were the ing industries than metro areas lost. For example, job only county types where manufacturing jobs increased during losses were relatively larger in apparel and textiles, two of the 1980's the largest nonmetro industries. Together, they account- ed for 21 percent of all nonmetro manufacturing jobs in Area 1969-79 1979-90 1977 but lost 130,000 jobs by 1990. The losses in these two industries accounted for 54 percent of the total number of Change in number of jobs jobs lost by nonmetro manufacturing industries. Despite these losses, the nonmetro share of textile and apparel U.S. total 959,160 -1,749,383 jobs rose from 37 percent in 1977 to 45 percent in 1990 Nonmetro 708,036 10,929 Urbanized 164,516 -108,412 because metro areas lost many more apparel and textile Less urbanized 469,844 74,618 jobs (585,000). Totally rural 73,676 44,723 Nonmetro Wages Fall Behind Metro Metro 251,124 -1,760,312 The downside of the relatively strong, broad-based manu- facturing job growth in nonmetro areas during the 1980's Source: Calculated by ERS using county-level data from the Bureau was a fall in relative wages. This deterioration in relative of Economic Analysis. wages is a significant departure from the 1970's. From 1969 through 1977, nonmetro earnings per manufacturing In even starker contrast, manufacturing jobs increased by job never deviated more than six-tenths of a percentage only 1.5 percent (251,000 jobs) in metro counties. point from 74 percent of metro earnings (fig. 1). The ratio peaked at nearly 76 percent of metro earnings in 1979 and The trend in manufacturing jobs reversed during the then fell almost continuously to just over 70 percent in 1980's. Nationally, manufacturing industries lost 1.7 mil- 1990. lion jobs between 1979 and 1990, almost twice the number of jobs added during the previous decade. The decline The decline in nonmetro earnings per manufacturing job took place in metro and urbanized nonmetro areas. Less was not just a relative decline—earnings also fell in real urbanized and completely rural counties performed best, terms. During the 1970's, real earnings per job in non- as they had during the 1970's, although their rate of metro manufacturing rose over 10 percent, growing increase dropped. Combined, they gained over 119,000 slightly faster than metro earnings. During the 1980's, manufacturing jobs. In contrast, urbanized nonmetro nonmetro manufacturing earnings fell, losing half the counties lost 108,000 and metro areas lost 1.8 million man- gains achieved during the 1970's. In contrast, real earn- ufacturing jobs. ings per job in metro manufacturing rose throughout most of the 1980's. The 1980's started with back-to-back recessions that were very hard on manufacturing. All county types lost sub- Why Would Earnings Fall While Jobs Increase? stantial numbers of manufacturing jobs during those Unfortunately, evidence suggests that nonmetro wages recessions, but only in the less urbanized and completely have declined because changes in the underlying struc- rural nonmetro counties did job growth during the ture of manufacturing have deteriorated the competitive remainder of the decade exceed the losses. position of rural areas. The occupational structure is shift- ing higher paid nonproduction jobs to metro areas, and Most Major Manufacturing Industries Shifting to growth in labor productivity in nonmetro areas is lagging Nonmetro Areas metro growth. During the 1980's, the shift in manufacturing employment to nonmetro coimties was fairly broadly distributed across Occupational Shifts Contribute to Wage Gap. The the 20 major manufacturing industries. Over half the changing occupational structure within manufacturing major manufacturing industries registered job gains in has had a marked impact on relative wages. An impor- nonmetro counties (growing nonmetro industries are tant characteristic of more flexible manufacturing process- shown in bold type on table 3, page 6). This compares es is an increase in the demand for nonproduction work- with metro gains in just two industries; one of these, ers such as engineers, computer programmers, and other instruments, was also the only manufacturing industry specialists and a corresponding decrease in the demand that became more concentrated in metro areas during the for production workers. Data from the Census of 1980's. Manufactures and the Annual Survey of Manufactures show that the ratio of nonproduction workers to produc- tion workers increased much faster in metro manufactur-
Rural Development Perspectives, vol. 9, no. 3 Figure 1 Nonmetro earnings relative to metro earnings and nonmetro shiare of manufacturing jobs As the nonmetro share of manufacturing jobs has increased, nonmetro earnings have decreased relative to metro earnings Nonmetro earnings per manufacturing Nonmetro percentage job as a percentage of metro eamings oi manufacturing jobs 76- ^ r23
1969 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 Source: Calculated by ERS using data from the Bureau of Economic Analysis.
Figure 2 Nonmetro pay per manufacturing worl(er relative to ing than in nonmetro manufacturing between 1977 and 1991 (fig. 2). Because nonproduction workers receive sig- metro pay Pay per nonproduction worker in nonmetro areas fell from nificantly higher wages than production workers, this 85.8 to 80.7 percent of metro pay between 1977 and 1991 occupational shift accounts for part of the decline in non- metro manufacturing wages relative to metro wages.
The wages of nonmetro production workers remained fairly constant relative to metro workers throughout the 1980's at about 80 percent. Wages of nonmetro nonpro- duction workers, in contrast, fell from just over 85 percent of metro wages in 1977 to just over 80 percent in 1991. At the same time, the ratio of nonproduction to production workers increased 36 percent in metro manufacturing but only 20 percent in nonmetro manufacturing. Thus, not only did the relative wages of the more highly paid non- production workers in nonmetro areas decline but their share of nonmetro manufacturing jobs also fell further 1977 87 behind the metro share. Source: Author's calculations using data from the 1977 and 1987 Censuses of Manufactures and the 1989-91 Annual Surveys of Manufactures. Nonmetro Labor Productivity Growth Falls Short of Metro. Labor productivity growth is a key measure of the performance of an economy because it is a fimdamental Nonmetro industries are, in general, less productive than condition for rising wages and a rising standard of living. their metro counterparts. Furthermore, despite nonmetro As a general principle, the higher a worker's productivity, productivity growth of over 50 percent between 1977 and the more the worker will get paid. Thus, in the long run, 1991, the productivity gap increased because metro labor wages will not rise faster than output per worker for a productivity grew even faster. In 1977, value-added per significant part of the workforce. If nonmetro areas are to worker in metro manufacturing was 22 percent higher close the gap in eamings per job with metro areas, labor than in nonmetro manufacturing (table 2). By 1991, this productivity must grow substantially. gap had increased to 30 percent.
Rural Development Perspectives, vol. 9, no. 3 Table 2 Value-added per manufacturing worker Although nonmetro productivity increased rapidly between 1977 and 1991, metro productivity grew faster, increasing the gap
Change, Item 1977 1987 1989 1990 1991 1977-91
rtîfutîi
Nonmetro 33.3 50.9 51.4 50.3 51.2 53.7 Metro 40.7 63.3 64.9 65.1 66.6 63.7
$1,000 difference between metro and nonmetro Metro-nonmetro productivity gap 7.4 12.4 13.5 14.8 15.4 NA
Note: Value added is the difference between the value of production and the cost of materials used. Source: ERS analysis of data from the Census of Manufactures and the Annual Survey of Manufactures.
Nonmetro labor productivity was lower than metro in 15 consists of relatively low-productivity industries. For of the 20 manufacturing industries in 1991 (table 3). example, the six industries with the lowest level of labor Furthermore, the gap between value-added per worker productivity in nonmetro areas accounted for 32.5 percent increased in all 15 industries between 1977 and 1991. of norunetro manufacturing jobs. In contrast, the six Although nonmetro productivity is higher than metro in metro industries with the lowest labor productivity five industries, four of those industries are among the accounted for only 14 percent of metro manufacturing lowest productivity industries. Some of the overall gap in jobs. However, industry mix does not explain all of the manufacturing productivity is the result of the much larg- productivity gap. If nonmetro manufacturing jobs were er metro job losses in these low-productivity industries distributed across industries the same as metro jobs, but such as textiles and apparel than nonmetro job losses. maintained their own level of productivity (multiplying nonmetro output per worker in each of the 20 manufac- Why the Widening Productivity Gap? turing industries by the corresponding metro employment That labor productivity is lower in nonmetro manufactur- share), the gap in output per worker would be reduced by ing than in metro manufacturing is, in itself, neither sur- about a third. prising nor especially alarming. It has long been recog- nized that the type of manufacturing activity that tends to Capital per Worker Is Not a Factor. Labor productivity is locate in nonmetro areas often produces standardized, also affected by the amount of capital per worker (capital low-value-added products. What is of concern is that intensity). In general, the more capital that is available for nonmetro labor productivity is growing more slowly than each worker, the more each worker will produce. metro. Furthermore, because labor and capital can be substituted for each other, areas with relatively low-cost labor would While an entirely satisfactory explanation has yet to be be expected to have less capital per worker, and conse- developed, a number of factors clearly contribute to both quently lower labor productivity. lagging productivity and lagging wages. One factor is the shift in occupational patterns. As discussed above, one of However, data from the Census of Manufactures shows the characteristics of firms that have adopted more flexi- that capital intensity in nonmetro manufacturing was sim- ble manufacturing processes is a relatively large propor- ilar to metro capital intensity. In 1977, the capital/labor tion of nonproduction workers. If more flexible establish- ratios in nonmetro and metro manufacturing industries ments are also more productive, it follows that the above were essentially the same. In 1987, the nonmetro shifts in occupational structure contribute to lower non- capital/labor ratio had fallen slightly to 97 percent of the metro productivity growth. Three other contributing fac- metro ratio. tors are industry mix, the amount of capital per worker, and agglomeration economies. The estimate of total capital may not be an accurate mea- sure of relative capital intensity because it includes both Industry Mix Accounts for Part of Productivity Gap. plant and equipment. The inclusion of buildings in the One reason that overall labor productivity in nonmetro measure of capital may bias the comparison because of manufacturing is lower than metro manufacturing is that the higher costs of land and buildings in metro areas. a relatively higher proportion of nonmetro manufacturing Looking just at the equipment portion of capital avoids
Rural Development Perspectives, vol. 9, no. 3 Table 3 Value-added per worker and share of manufacturing jobs by industry, 1991 Nonmetro workers in most manufacturing industries have lower productivity ttian metro workers, and nonmetro manufac- turing is more concentrated in lower productivity industries; both conditions contribute to lower overall productivity among nonmetro manufacturing workers
Distribution of Standard Value-added per worker Ratio of manufacturing jobs 11inrli luuoii iQtri^l lai nonmetro code industry Nonmetro Metro to metro Nonmetro Metro
d^^ AAA rerceniDoi'/^ant
20 Food and Icindred products 74.5 110.2 67.6 11.6 7.9 21 Tobacco products 292.4 688.4 42.5 .2 .3 22 Textile mill products 45.0 43.9 102.4 7.6 2.3 23 Apparel and other textile products 29.3 38.6 76.0 9.7 4.5 24 Lumber and wood products 43.7 41.4 105.3 8.4 2.2
25 Furniture and fixtures 41.9 46.1 90.8 4.0 2.3 26 Paper and allied products 110.6 86.5 127.9 4.7 3.4 27 Printing and publishing 51.8 73.7 70.3 5.2 10.0 28 Chemicals and allied products 173.4 185.5 93.5 3.7 5.5 29 Petroleum and coal products 200.1 214,8 93.1 .4 .8
30 Rubber and miscellaneous plastics products 62.7 59.7 105.0 5.5 4.8 31 Leather and leather products 35.0 43.3 80.8 1.1 .5 32 Stone, clay, and glass products 65.6 66.4 98.7 3.3 2.7 33 Primary metal industries 65.6 70.6 92.8 3.5 4.2 34 Fabricated metal products 55.1 57.8 95.3 6.4 8.6
35 Industrial machinery and equipment 62.6 72.4 86.5 8.9 11.1 36 Electronic and other electric equipment 72.6 75.8 95.8 6.6 9.0 37 Transportation equipment 60.8 98.6 61.7 5.8 11.1 38 Instruments and related products 88.9 91.4 97.2 1.7 6.6 39 Miscellaneous manufacturing industries 56.1 55.8 100.6 1.6 2.2
NA All manufacturing 64.1 83.3 76.9 100.0 100.0 NA Nonmetro using metro job distribution"" 70.8 NA 85.0 NA NA
NA=Not applicable. Note: Industries shown in bold type increased employment In nonmetro areas during the 1980's. ^This calculation shows what nonmetro value-added per worker would be if the distribution of nonmetro manufacturing jobs were the same as the metro distribution by industry. Source: ERS analysis of Census of Manufactures and Annual Survey of Manufactures data.
this problem. Equipment per worker in nonmetro manu- the ability of nonmetro areas to compete for manufactur- facturing was 102 percent of metro in 1977 and 101 per- ing jobs would be reduced because any given combina- cent in 1987. The nonmetro capital/labor ratio thus tion of capital and labor would be less productive in non- appears to be equal to or even higher than the metro ratio metro than metro areas. With lower productivity, non- and so does not explain the productivity gap. metro areas would have to compete on the basis of lower land, labor, and capital costs. Lower land costs certainly Agglomeration Economies Boost Metro Productivity, But favor nonmetro areas, but the presence of agglomeration Their Effects Declined During the 1980's. A third possi- economies implies lower wage rates would also be neces- ble cause of lower nonmetro labor productivity is the exis- sary for norunetro areas to compete successfully. The tence of agglomeration economies (see "Agglomeration stronger agglomeration economies are, the lower relative Economies/' p. 7). If agglomeration economies are strong.
Rural Development Perspectives, vol. 9, no. 3 wages would need to be for nonmetro areas to remain because they imply that firms located near other firms or competitive. in larger labor markets will be more productive than more isolated firms. For example, smaller establishment size Previous research showed that the strength of agglomera- and the need for more flexible labor arrangements, tion economies declined during the 1970's and that this including greater use of part-time and contingent work- weakening of agglomeration economies may have been a ers, implies that location in metro areas will be advanta- major factor in the nonmetro turnaround of the 1970's. geous because of the wider array of general business ser- However, many of the changes associated with the vices and larger labor markets. Likewise, the greater restructuring of manufacturing, especially the adoption of demand for current information on markets and the more flexible production technologies, may contribute to greater need for coordination among producers implies, if an increase in the importance of agglomeration economies not a metro bias, at least an advantage for locations near similar firms or in industrial districts. Agglomeration Economies Contrary to many of these predictions, agglomeration The notion of agglomeration economies is that certain economies do not appear to have become more important conditions within a community or area mal
Estimating Agglomeration Economies Figure 3 Change in output due to agglomeration economies I measured agglomeration economies for this study by Although their effects weakened in 1987, urbanization and estimating production functions for all manufacturing localization still increase output, at least partially explaining industries. A production function is a mathematical the metro advantage in productivity and wages expression that shows the relationship between output Percent and the factors which contribute to output, such as labor and capital.
For each manufacturing industry, I used standard regres- sion techniques to estimate an equation in which output is a function of capital, labor, population (to measure urban- ization economies), and employment in similar industries (to measure localization economies). The estimated coef- ficient on population thus indicates the additional output expected in high population areas. Likewise the estimated coefficient on industry employment indicates the additional output expected in areas with high concentrations of relat- ed industries. Unpublished Census of Manufacturing data from the Center for Economic Studies were used. 1977 1987 Source; Author's calculations, see "Estimating Agglomeration Economies" for details.
Rural Development Perspectives, vol. 9, no. 3 ing the prospects for economic growth in nonmetro areas. difference unless it is accompanied by efforts to reduce In the face of huge job losses in metro counties, less some of the adverse effects rurality has on the location of urbanized and completely rural counties added nearly manufacturing activity. half a million manufacturing jobs. However, optimism should be tempered by the fact that wages and productiv- The relative isolation of rural communities and the ity in nonmetro manufacturing fell further behind those of absence of agglomeration economies are likely to pose metro manufacturing. Low wages were apparently more increasing handicaps in attracting and retaining quality important in nonmetro manufacturing job growth during manufacturing jobs as the manufacturing sector continues the 1980's than during the 1970's. to evolve. An effective approach to making rural commu- nities more competitive thus involves finding ways to The challenge facing rural development policymakers is reduce the costs of rurality by connecting nonmetro firms to craft policies that will lead to labor productivity growth and entrepreneurs to sources of information, innovation, in nonmetro industries. Upgrading job skills of the rural and finance, and by increasing their access to expanding labor force is obviously an important component of any global markets. Networking by firms is the most widely strategy to enhance the competitiveness of rural areas, discussed strategy to allow groups of small nonmetro especially in light of changing labor demands in the manufacturing firms to replicate some of the agglomera- emerging manufacturing environment However, tion advantages of metro firms. upgrading the labor force is unlikely to make much of a
8 Rural Development Perspectives, vol. 9, no. 3