Roland Zullo is a research scientist with U-M’s Institute for Research on Labor Employment and the Economy (IRLEE). He and colleague Kallol Mukherji recently completed a study that examined the impact of manufacturing job losses on local jobs. The basic finding: the ripple effect of lost jobs in the motor vehicle manufacturing industry is much more serious and long-lasting than previously believed. Michigan Today asked Zullo about his study.
MT: You have been researching the way manufacturing job losses affect employment elsewhere in the economy. Can you give us an overview?
What we set out to do is examine how job loss in the motor vehicle sector affected local employment, looking broadly at industries close to motor vehicles, such as machinery manufacturing as well as sectors that may seem distant from motor vehicles, like education.We analyzed county-level data over the 2001 to 2008 period, which includes the automotive sales peak at the beginning of the decade and subsequent job loss due to the severe recession. During that time Michigan counties lost roughly 46 percent of jobs in the motor vehicle sector.
Every lost job in motor vehicles led to the loss of another eight.
What was different about our analysis is that we examined the effect of motor vehicle job loss on other jobs over a five year span; the current period plus four lagged years. Summing the associated job loss across all industries gave us a ripple effect of one to eight, meaning that for every lost job in motor vehicles, the nearby county lost eight jobs.
MT: One lost manufacturing job leading to eight other lost jobs? Could it really be that high?
The reason for the higher than expected job loss multiplier is that we looked at the effect over five time periods. Previous research found a multiplier of 2.5 to 3, but only for the current year plus one lagged year. My estimates for those two periods was 2.8—so right in the same ballpark.The surprise was in the longevity of the aftershock. Manufacturing-related regional job losses occur four years after communities experience job dislocations. It may even extend further, but we didn’t have the data to confidently test whether this was the case.
MT: Break down those numbers for us. Where do you see the biggest impacts?
Not surprisingly, sectors that serve the auto assembly and parts sectors were greatly impacted by the downturn. Machinery manufacturing, fabricated metals, and plastics and rubber products, for instance.However, the reach of the downturn also affected industries that are highly dependent on strong local economies, such as construction. We also detected a strong negative effect on professional services and public services.
MT: What was the most surprising or unexpected thing you found?
Perhaps the most surprising finding was that the ripple effect grew as time passed. Up through the second year (including the contemporaneous year) a job lost in motor vehicles equated with a loss of 1.5 jobs. By year four, this increases to over two jobs.In other words, the negative local employment effects from downsizing in motor vehicles is not short-term, but at least medium-term. The initial shock to a community is severe, but the effect becomes even more intense with passing years. Recovery takes quite a long time.Much of the reason is that while some sectors are affected immediately, for others there is a lag. K-12 public education, for instance, is hit rather hard two years after the motor vehicle downsizing. Not coincidentally, the deepest year of the recession was 2009, and now, two years later, public services across Michigan are under fiscal stress.
MT: You mention that professional and public services took a hit, and you also single out K-12 education as being affected. Normally we don’t think of schoolteachers and public employees being affected by auto layoffs.
The lag for public workers is partly due to the administrative time required for state and local governments to collect taxes and distribute revenues. State and local governments develop budgets based on revenues collected one or two years prior. For motor vehicles, the deepest year of the recession was 2009, so here in 2011 the fiscal crises has hit the governmental sector.Another possibility is that the working-age population moves away, taking with them their children in K-12. For teachers anyway, there might be less of a demand for them because school populations decline. We would expect a lag for this to happen as well.
MT: Is any economic sector immune?
In general, sectors unrelated to auto that serve national or international markets were immune. Agriculture and food manufacturing, two significant industries in Michigan, were unaffected by the loss of motor vehicle jobs.
MT: What are the implications for policy? The loss of manufacturing jobs has hit Michigan especially hard, but this is also a national issue. What kinds of things can the state and the country do in the face of these massive impacts on employment?
One myth we should abandon is that our economy can neglect manufacturing and successfully transition to an economy based on high end services, or advanced technology. The low-tech/high-tech dichotomy is over-simplistic, if not false. We found that professional, scientific and technical jobs were significantly affected by the motor vehicle layoffs, presumably because persons in these jobs work in and around manufacturing.
Exports are crucial to bringing wealth from outside the state into Michigan.
Every industry has a technical or design dimension that requires nearby professional skills. The idea that we can engineer products in Michigan, yet have the products made overseas, is a theoretical model without much applied supporting proof.More generally, it would seem advantageous for the state to adopt policy designed to reward or support firms that manufacture goods for export. If successful, wealth from outside of Michigan is then imported. More important, creating or sustaining manufacturing jobs provides gainful employment for the roughly half of the Michigan workforce without a college degree. We want to have all Michigan citizens active participants in the economy—as both workers and consumers. This is the way to achieve robust growth.
MT: Why would an export-based economy work better for Michigan than one based on, say, services or health care?
Generally, export industries, especially value-added manufacturing, bring more wealth into Michigan. They draw in money from outside the state, rather than just circulating it within the state. Also, value-added manufacturing provides gainful employment for citizens of all education backgrounds, especially when wage-earners are unionized.Services can also bring in wealth, and should certainly not be neglected. For instance, U-M is an education service that attracts tuition-paying students world-wide. Health care, likewise, is a high value added activity that creates many decent paying jobs.But U-M and our hospitals are the exception rather than the rule in regards to the effect of services on the economy. Most services operate locally (e.g. banking, real estate, health care) by serving nearby populations. And, in most instances a degree is required for someone working in a service to earn a middle-class income. Within hospitals, doctors and nurses usually do fine; housekeepers and custodians much less so.What this study revealed is how dependent local businesses are on the wealth imported and jobs created by the motor vehicle manufacturing sector. Michigan will in all likelihood never regain the jobs lost through the downsizing of that sector over the past several years. Then the question, moving forward, is what do we replace it with? I would suggest a focus on the existing manufacturing sectors that have viable export markets. Expanding these industries means importing wealth and creating gainful employment that will, in turn, revive local economies.
What do you think? Surprised by the impact of manufacturing job losses? Are you optimistic about Michigan’s economy? Think we should be pushing exports? Share your thoughts in the comments section.
David Sponseller - 1958, 1962
Excellent study and article! The wave of employment flowing into Michigan with the auto industry 100 years ago was the greatest any state has ever experienced and no replacement for it is likely to be found. Half of those jobs were stolen by unfettered imports mainly of Japanese and Korean cars. Yet we retain the engineers, experienced workers, factories, and equipment to remain the world center of the auto industry. Our auto and civic leaders should work feverishly to make the policy case for trimming SIGNIFICANTLY the numbers of imported cars!
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Jim Curtis - 1991
Among many other probabale factors, what role have the auto makers themselves played in our demise? Moving factories to other states, outsourcing parts manufacture to foriegn factories, producing products that were of sometimes questionable value and quality, etc. all have played significant roles in the downturn of Michigan’s economy.
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Thomas Varbedian MD - 1952 1956
Overly simplistic – totally oblvious to the fact that unsustainable union demands on wages etc. drove industry out of our state to foreign countries who were able to produce product equal to or better than ours at a profit
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Tom Hackley - 1970, 1973
Excellent clarification of a topic that should be addressed by politicians and policy makers statewide and nationallly. I can’t imagine a big resurgence of manufacturing in the state of Michigan until the global cost of labor begins to level out. Even medical services are being globalized as some countries are developing medical tourism boosted by favorable labor rates, malpractice and insurance laws. Michigan still does have agriculture and tourism as export industries because the land cannot be sent overseas, though there’s little room for growth in those industries. Perhaps we could give a push to retirement communities to draw out-of-state money and population to our inherent natural beauty. And we still have education in the form of great universities and colleges of many varieties. I think the state could capitalize on this resource by investing in and growing the international and national footprint of our education system. We could do the same in secondary education, by investing in existing and new schools that would appeal outside our state to families who want to send their children to truly nurturing schools that can foster creative, innovative, problem-solving student learning environments, traits of American schools that other countries are envious of.
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Chris Slupek - 1976
The majority of your study/article is information which has been understood for years and is agreed to by most people.
One issue you failed to address is the affect on employment caused by what I’ll call “Unionization”. Although it can be argued that Unions did a great deal to improve the working conditions of laborers in the 1920’s and 1930’s, it can also be said that companies like Ford Motor Company paid the highest wages without having a union (this was before the UAW organized the workers at Ford).
Michigan’s current financial problems can be traced over the last 30-40 years to the unwillingness to become a Right to Work State, which does not require employees to be unionized.
Look at the Auto Industry in Michigan. For the past 30 years the State was unable to attract foreign Auto manufacturers to build manufacturing facilities in Michigan. I worked for a Japanese company for 20 years and it was understood how Japanese companies would never locate major manufacturing facilities in Michigan when there were Right to Work states like Kentucky, Alabama, Texas, ect. which did not require workers to be unionized.
Michigan has seen the decline of the U.S. Domestic Auto Industry with a constant decline in vehicle production with no replacement by the Auto companies like Toyota, Nissan, or Honda coming to Michigan to replace the losses at GM, Ford, and Chrysler.
A better study and use of funds given for these kinds of studies would be the affect of Unionization the past 30-40 years in Michigan.
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marc schiller - 1974
Many good points in the study. Agree with other readers — Unionization effect was major cause of decline of Michigan’s auto industry.
But the authors are correct on the main point:
without real manufacturing producing real goods, the “service and technical support” activity is relatively meaningless. Services and technical design FOLLOW manufacturing, they do not LEAD manufacturing. It raises an important question: if our technical and design skills from UM and other universities are so great, why don’t we PRODUCE all the high value electronic goods like cell phones, PCs, and more sophisticated items HERE? Or the same for biotech, energy, etc. Surely we have invested in the wrong stuff–and educated too many specialists–please, no more “personal financial analysts”! We need to invest in projects that DO things, not just analyze and theorize. We were once a State (and nation) of DO-ERS, now we are pundits, theorists and “investors”. Hogwash! DO something!
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Thomas Buckley - 1970 MBA
This is a worthwhile study and I essentially agree with the above comments. While there have been many contributors to the decline of the domestic auto industry, it is my believe that our Federal Government has been and continues to be the primary contributor. I believe that the most damaging are the CAFÉ (Corporate Average Fuel Economy)increasingly stringent standards. These are largely based on agenda driven science that manmade CO2 is driving climate change or is otherwise harmful to humans. Regulation of manmade CO2 will provide no significant benefit while causing significant economic damage. The following two books provide documentation for this position.
“The Great Global Warming Blunder – How Mother Nature Fooled the World’s Top Climate Scientists†by Roy W. Spencer
“Global Warming False Alarm – The Bad Science Behind The United Nations Assertion That Man-Made CO2 Causes Global Warming†by Ralph B. Alexander.
If desired, a more detailed report is “Climate Change Reconsidered†by the Nongovernmental International Panel on Climate Change.
I believe that the false assertion that manmade CO2 is harmful and/or a significant cause of climate change is the basis for much of the ill-advised energy regulation, including CAFÉ, and domestic energy access limits. In my opinion, the United States and world would be much better served if we spend our limited resources on prudent safety and emission standards while allowing the free enterprise system to solve our energy problems without CO2 restrictions.
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David Richards - 1968
The point of the article, that the negative effect of loss of manufacturing jobs is greater and longer lasting than has been anticipated, is a significant one.
Some of the other commenters seem to be obsessed with a hostility to unions, an obsession that is a sign of the times. The automobile industry did well for many decades with strong unions and high employee compensation. Before we weaken or eliminate unions, and reduce our labor costs to that of third world countries so we can have more manufacturing jobs, we should keep in mind that doing so will cost us the benefit of having those jobs.
Also to be considered in figuring out why we have lost so many manufacturing jobs is the advantage foreign manufacturers, including the automobile companies in particular, have had with respect to the cost of medical coverage for current and former employees. Our competitors have had national health care systems paid out of tax dollars. Here, it is part of the compensation paid by the employer, leaving American companies at a competitive disadvantage.
The automobile companies and the unions had made adjustments in employee compensation to reflect changing times, but too late for GM and Chrysler to survive the combination of the financial collapse and $4+ gas prices in 2008.
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Ralph Dratman - 1972
This is an excellent article. I would like to see some additional reporting on the continuing time course of the effects of these lost jobs. Unless I missed something, it appears that the endpoint, if any, of these growing effects has not been reached.
If the effects continue year after year for a decade or more, one might eventually conclude that a tipping point had been reached, such that the total flow of income into the state had fallen below the threshold of economic viability for some communities. If that is not the case (I hope not!), when, and in what way, do the effects of the manufacturing job losses eventually stop increasing?
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Ronald Modreski - 1965
I found the study worthwhile and many of the comments very appropriate and probably “on target” without requiring a long study. It is interesting that we are having a panel discussion at the “Economic Club of West Michigan” on April 18 (tommorrow) on the topic “Should Michigan be a Right-to-Work State”? Unfortunately (from my perspective) the speakers are representing organized unions and an economist. No one is representing the employeers who are forced to work with union leaders and often politicans in Michigan who appear to be supportive of the unions in spite of the data from the last 40 years of the unintended consequences of successful union negotiations. I worked for a large global corporation that use to have headquarters in Michigan that was forced to relocate many manufacturing plants to the south in the 70’s and 80’s because of the pressures of the high wages and poor productivity from the auto industries. The moves were very successful since all the plants were in right to work states like Mississippi, Arkansas, Georgia, South Carolina, and Alabama. I lived in the south for almost 15 years and returned to Michigan many years ago. I was agast at how much the auto industry had declined yet the union leaders and Michigan politicans continued to act as if nothing was wrong and it was just the problem of the leaders of the companies. Well we now see the results. The same thing is going to happen to the public education system and much of higher education because of unstainable union negotiations (wages and benefits) and tenure. Also many local and county government administrations will suffer the sam consequences. I am saddened since the state appears to be headed to the same place as the city of Detroit is in today.
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Timothy Athan - 1994
So much blame here is leveled at unions. I’ve worked for GM for years, and I place the blame on too-small government, specifically, our government wasn’t aggressive enough in anti-trust activity.
Its not union demands that make GM so inept, it is a risk-averse bureaucracy. That was born from oligopoly. Had the government broken GM in 1960 — Robert Kennedy had plans — GM divisions would have stayed competitive and foreign car companies would never had attained a foothold in America.
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Joseph McElroy - 1981
Excellent article and research. Now, if only we could get our citizens to accept third world wages, health care, and security then all would be well. It is amazing what passes for knowledge.
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