The Finger Lakes – Economic Challenges and Strategic Response: An Assessment

This research is a case study of employment challenges facing the Rochester Metropolitan area and the Finger Lakes region, and an analysis of the region’s strategic economic development plans and reports, developed in response to Governor Cuomo’s challenge to regions seeking economic development funding.  While the report finds reasons why the region’s recent weak economic growth may improve, there are real concerns about the focus of its strategic economic development plans, and the absence of meaningful outcome/impact measurement and analysis.

Employment History

The Rochester area, among all the metropolitan areas in New York State, was historically most dependent on a few large manufacturing employers.  Rochester companies like Kodak and Xerox were industry leaders that pioneered dominant imaging technologies in the 20th Century.  The 2011 Finger Lakes Strategic Plan[1] reported that in 1983, Eastman Kodak had 60,400 employees in the region, and that “Kodak, Xerox, Bausch + Lomb, and General Motors employed nearly one fifth of the local workforce and indirectly had an impact on half of the region’s economy.”  Today, according to Greater Rochester Enterprise,[2] Kodak employs 1,750, and Bausch and Lomb 985, while Xerox, according to the Rochester Democrat and Chronicle, employs 3,400.[3]  General Motors employment in Rochester is 880.[4]  Together, these companies now account for about 1% of regional employment.

Over the 47 years between 1970 and 2017, manufacturing employment in the Rochester MSA declined by 63% – from 152,511 to 56,546.  The number of manufacturing jobs decreased in every decade, except the 1970-1980 decade. In 2017, 11% of Rochester MSA employment was in manufacturing industries, compared with 10% nationally.

The presence of large manufacturers in the 20th Century was good for employee incomes as well.[5]  In 1970, average worker earnings were 12% higher than the national average.  Because of the shift of employment from manufacturing to lower paying service sector occupations, Rochester area average worker earnings in 2016 were 8% lower than the nation.[6]

Like other rust belt areas, and neighboring Buffalo-Niagara Falls and Syracuse, Rochester’s employment growth since 2000 has been nearly non-existent. Rochester area employment grew by less than one percent by 2017, while Buffalo grew 1.4%, and Syracuse lost 2%.[7] Employment growth for the nation was 12% during the period.

Manufacturing employment declined substantially between 2000 and 2017 in the United States, upstate New York and the Rust Belt. In upstate New York,  Rochester and Syracuse were most affected, each losing more than 40% during the period.  Buffalo lost more than 35% of its manufacturing jobs.  These locations and most rust belt metros lost greater percentages of manufacturing jobs than the United States, which lost 28%.

Automobile manufacturing industries experienced a sharp employment decline with the bankruptcies of GM and Chrysler in 2009.  But, the federal bailout led to a substantial increase in employment after that.  As a result, automobile manufacturing employment grew by 25% between 2010 and 2016, compared with 5% for other manufacturing industries.  Metropolitan areas like Detroit, and others in Michigan and Ohio that have high concentrations of manufacturing had stronger manufacturing employment recoveries than those in New York.

Since the recession of 2008-10, manufacturing employment in Rochester, Buffalo and Syracuse has seen smaller declines or has stabilized.  Buffalo’s manufacturing employment has been stable for the past four years, while Syracuse has seen a rebound after losing New Venture Gear/Magna in 2012, and Rochester’s decline has slowed.  In Rochester, continued job losses in chemical manufacturing (primarily Kodak) accounted for 4,402 jobs lost between 2010 and 2017.[8]

While manufacturing employment declined significantly after 2000, employment in other private sector industries continued to grow in Rochester, Buffalo, Niagara-Falls, other rust belt metropolitan areas and the nation.  Nationally, private sector non-manufacturing employment grew by 19%, the Rochester MSA grew by 13%, Buffalo-Niagara Falls by 9.7% and Syracuse by 5.8%.

Overall, the Rochester MSA’s performance since 2000 is near the middle of the group of rust belt metropolitan areas, even though only Flint and Ann Arbor, Michigan and Youngstown, Ohio lost greater percentages of manufacturing employment.  Rochester’s weak manufacturing performance was offset by relatively strong employment growth in non-manufacturing industries, compared to other rust belt metropolitan areas.

Industry Performance from 2010-2017

Industry Sectors

Most service industries in the Rochester MSA saw growth between 2010 and 2017.  Employment in health care and social assistance increased by more than 8,000, professional and technical services grew by 3,861 and educational services increased by 3,250.  Nine industry sectors had employment growth of more than 10%.  Industry sectors  with significant employment decreases were management of companies and enterprises, losing 1,148, Information, losing 1,318 and manufacturing, losing 4,165.

Manufacturing losses were concentrated in two industries – chemical manufacturing, largely Kodak, which lost 4,402 jobs between 2010 and 2017, and machinery manufacturing, which lost 1,720.  The losses in chemical manufacturing were larger than the overall employment losses in manufacturing.

The performance of industries within the manufacturing sector varied.  The region saw significant employment growth in computer and electronic product manufacturing (1,268), and two food related industries – food manufacturing and beverage and tobacco product manufacturing (these industries grew by 1,661 employees).  But, other manufacturing industries each lost more than 500 employees:  machinery manufacturing, chemical manufacturing, miscellaneous manufacturing, transportation equipment manufacturing, and electrical equipment and appliances.

Industries with Largest Employment Gains

The industry showing the largest employment growth (5,453) in the Rochester area between 2010 and 2017 was professional and technical services.  Employment within the industry sector was primarily in four sub-sectors:  engineering services, information technology services, management, scientific, and technical consulting services and scientific research and development services.

Education and health related industries, so-called “eds and meds” also had relatively large employment growth. Hospital employment grew by 4,445 (18%) while educational services employment grew by 3,250 (13%).   Nursing and residential care facilities and ambulatory health care services each grew by more than 1,500 employees.  It should be noted that a large portion of the growth in employment in the health care industries is from health care use by area residents, not from service users from outside the region.

Fast Growing Companies

The Rochester metropolitan area had 22 companies on the Inc. 5000 list of fastest growing privately held companies for 2017.  The number of companies is 34% higher than would be expected from the area’s population.  Twenty of the Inc. 5000 growing companies in the area were service businesses, two were manufacturers.  Information technology services, particularly software services, was about one-third of the total, suggesting that the area has potential strength in this industry.

Finger Lakes Regional Economic Development Strategy

In 2011, Governor Andrew Cuomo restructured the delivery of economic development assistance to create a formal role for regional economic development councils in the decision-making process.  The regional economic development awards temporarily replaced the process of state legislative grant-making though so-called “member items.”[9]  That process required local organizations to request funding from individual state legislators.  Funding was allocated by party leaders within the legislature.  The new, executive branch-controlled process involves regional council members in the decision-making process, though the project scoring system allocates 80% of points to the state agencies administering projects, and only 20% to the regional councils.

As a part of the restructuring, in 2011 regions developed strategic plans.  The 2011 guidance document, “A New State Strategy for Economic Growth” required public involvement, an assessment of current conditions, issues and opportunities, creation of a vision statement, development of strategies and implementation agendas and monitoring and evaluation of effectiveness.[10]

In 2015, Governor Cuomo created a regional competition for $1.5 billion of state funding, with $500,000,000 awarded to each of three regions.  The purpose was to “create and maintain high-paying permanent private sector jobs and to lure private sector investments in amounts that are significant to the region.”[11]  The initiative required regional applicants to develop transformative regional strategies to create significant employment and income growth.  The Finger Lakes Regional Economic Development Council, along with Central New York and the Southern Tier received funding through the 2015 round.

The Finger Lakes 2017 Progress report describes the region’s strategies,

    • Three industry clusters, or pillars, that will act as the core drivers of job and output growth: (1) Optics, Photonics, and Imaging (OPI); (2) Agriculture and Food Production; and (3) Next Generation Manufacturing and Technology.
    • Three core enablers that will facilitate economic growth within the key pillar industries: (1) Pathways to Prosperity: Workforce Development; (2) Entrepreneurship and Development; and (3) Higher Education, Research, & Healthcare.
    • And four foundational strategies that will support the pillar and enabler strategies enhance the region’s quality of life and help the region attract and retain jobs: (1) Global NY; (2) Tourism & Arts; (3) Infrastructure & Transportation; and (4) Sustainability.[12]

Although some funding through the regional strategies involves traditional economic development assistance to business such as capital projects and worker training, most of the region’s effort is focused on developing broad based initiatives in support of economic growth – ranging from support for industry related research and manufacturing process improvements to entrepreneurial assistance, institutional capacity for workforce development and civic improvements.

Only 17% of regional “priority project” grants – projects designated by the Finger Lakes Regional Economic Development Council as important elements of its strategic plan went to businesses.  Most grants were given to non-profit organizations (60%), followed by universities and colleges (19%).

Analysis

At the outset it must be acknowledged that the Rochester metropolitan area’s economic performance since 2011 continues to be weak.  In fact, the Rochester MSA, along with Buffalo and Syracuse, had less employment growth between 2011 and 2018 than rust belt metropolitan areas in Ohio and Michigan, except for Youngstown.[13]  Also of concern is the difference in average wages between growing and declining industries.   The average wage in growing industries in the Rochester MSA was $45,752 in 2017, while in industries with declining employment it was $53,786.[14]

The regional strategies are works in progress.  Many of the projects initiated through the regional strategy have not yet been completed.  But, if the Governor’s approach is to have significant employment benefits, they are yet to be realized.

In this section, I examine strengths and weaknesses in the Finger Lakes Regional economic development strategy and in the overall strategic planning and implementation process as implemented by New York State.

Industry Targeting

The 2017 Finger Lakes Progress Report states that “Three industry clusters, or pillars, that will act as the core drivers of job and output growth: (1) Optics, Photonics, and Imaging (OPI); (2) Agriculture and Food Production; and (3) Next Generation Manufacturing and Technology.”

Much of the region’s funding reflected its stated priorities.  Photonics/Optics and Imaging received the largest amount of funding, $148,155,000 through 2016.[15]  $147,000,000 was granted to the AIM photonics facility.  Advanced manufacturing projects received the second largest amount – $69,457,000.  Higher Education, Research and Health Care received $39,498,000

The Finger Lakes regional strategies between 2011 and 2016 supported several of the region’s fast-growing industries, particularly education and research.  But, the emphasis overall in the strategic plans was on support of manufacturing related initiatives.  59% of regional funding went to advanced manufacturing and optics, photonics and imaging.  Manufacturing is important to the Finger Lakes economy – average wages are high, and the region benefits from the income that results from the sale of manufactured products outside it.  Consequently, regional efforts to help local manufacturers improve their competitive position should be key elements of the region’s employment retention strategy.

But, to identify next generation manufacturing and optics, photonics and imaging as two of the region’s three pillars driving job and output growth is unrealistic given the weakness of the area’s (and the nation’s) manufacturing performance in the past forty years.  Though it is true that the Finger Lakes region is far less dependent than it was on a few large manufacturers like Kodak and Xerox, without the employment losses at those businesses, the region’s manufacturing employment growth during the recovery since 2010, like that of the nation, continues to be slow, and has lagged service sector growth.  Manufacturing, including photonics, optics and imaging may grow, but because of its size and long-term growth, the fate of the region’s service sector is most important to future job creation.

In one significant way, the practice of grant making differs from the conception of the 2011 and 2015 strategic plans.   Higher education and health care received about 11% of all funding – nearly $40 million.  The plans view higher education and research as enablers – ways to develop the workforce to encourage employment growth in photonics/optics/imaging, advanced manufacturing and technology and agriculture/food processing.  But, in fact, higher education and research are among the region’s largest industries and are also among those that have shown the most employment growth since 2010.  Future planning efforts could benefit if they viewed growing traded service industries, including higher education and research and professional and technical services as employment drivers.

Optics, Photonics and Imaging

Optics, photonics and imaging is by far the largest manufacturing initiative in the Finger Lakes strategy.  Greater Rochester Enterprise lists optics, photonics and imaging companies in the greater Rochester region.  Companies on the list in related industries employed about 11,000 workers in the region in 2018.[16]  Because the industry grouping contains Kodak and Xerox, employment has declined substantially over the past 40 years.  To support future industry growth, the Finger Lakes region has made substantial efforts to support photonics initiatives at universities and other research and development institutions.

The most significant funding initiative through the regional strategies has been the American Institute for Manufacturing Integrated Photonics partnership.  The AIM Photonics initiative is a $600 million public-private partnership that will receive $250 million of state support and $110 million from the Federal Government.  The initiative is the region’s largest single bet for future employment growth.

The largest portion of AIM Photonics Initiative funding in the region – $147 million – went to create a photonics test, assembly and packaging facility in Rochester for industry partners.  The objective of the effort is “invest in nurturing start-ups, enable small businesses and attract large enterprises” in order to “create thousands of jobs.”[19]  The Finger Lakes regional strategy includes some significant efforts to support entrepreneurs and small businesses in the field.

To attract major industry companies to build large manufacturing plants, the region must develop industry intelligence, relationships with key industry players and build a long-term marketing campaign.  In addition, appropriate sites for manufacturing facilities should be evaluated, permitted and basic site infrastructure development should be undertaken.  Finally, attracting such a facility would require a large grant from New York State.  Even so, because there is intense competition for major manufacturing plants, because electronics manufacturing has largely moved off-shore, and because the region does not have growing major regionally based stakeholders in photonics, success could be elusive.

A Strategic Plan, or a Strategic Planning and Implementation Process?

Strategic plans are of no real value if they do not guide actions, effectively measure outcomes against goals, and use knowledge gained in the implementation process to guide future action.  Though the 2011 guidance for regional strategic plans required “monitoring and evaluation of effectiveness,”[20] regional plans have focused primarily on describing the funding status of projects, rather than outcomes.

Finger Lakes 2017 Annual Report – Progress

The 2017 Finger Lakes Progress Report section titled “Progress” begins, on pages 5-9 with a series of charts showing economic conditions in the region.  Though the section is labelled “progress,” the charts do not examine the impacts of actions taken by the regional councils and the state in funding projects.  Instead, we cannot know whether the conditions described are a result of regional initiatives or would have occurred in their absence.

The second section of the “Progress” section is a listing of funded projects.  In this section, projects are identified with the amount of state funding received, total project cost, and project status (i. e., progressing on schedule, complete, etc.)

The final section provides aggregated data about project funding and status.  In this section, there is a table on page 17 labelled “job creation to date”.  But the data is provided without information about its source.  Does the table show the estimated number of jobs created and retained based on contractual commitments to the state or are they actual jobs as measured by Empire State Development in its post-funding employment compliance reports?[21] Equally important, the measures of actual or projected job creation and retention are not tied to specific goals, project categories, or projects.  As a result, the chart is of no value in assessing progress against program or project goals.

Finger Lakes 2017 Annual Report –“Implementation Agenda”

The following section of the 2017 Annual Report labelled “Implementation Agenda” looks at specific regional strategies.  The sections detail activities undertaken by regional entities in support of major initiatives.  For example, the first portion of the section, “Workforce Development” explains how workforce development is delivered in the Finger Lakes region, describing the steps being taken to address the need to help workers acquire marketable job skills.  The quantitative data provided shows intermediate program activity but does offers little information about how many workers were able to get jobs because of the assistance provided.  Here is an example:

“In the past program year, the three workforce development boards

and their community partners have achieved a record of success in several areas. Collectively they:

      • Hosted 125 recruitments and job fairs attended by 6,000 job seekers.
      • Funded skills training for 800 workers and job seekers.
      • Served 20,000 customers at their career centers throughout the region.
      • Helped 14,700 job seekers find employment (latest data from the 2016 program year).
      • Served more than 1,000 youth with employment and job readiness services.
      • Hosted multiple special events and programs such as Finger Lakes Works with their Hands, Health Care Career Day,
      • Rochester Work’s Criminal Justice Partnership, Agricultural Career Day, and del Lago Casino & Spa recruitment days.”[22]

 The section then provides a number of vague assertions about program effectiveness.

“Employers are moving the Finger Lakes forward.

  • Through initiatives such as the Young Adults Manufacturing & Training Employment Program (YAMTEP).

Economic developers are moving the Finger Lakes forward.

  • In partnership with Monroe Community College, Monroe County is leading the charge to train the local workforce with the new LadderzUP program. The program recruits, trains, and places workers into the most in demand careers in the region.

Secondary educators are moving the Finger Lakes forward.

  • The Hillside Work – Scholarship Connection has been a consistent beacon of hope for at risk youth in the region for thirty years.
  • Students that fully participate in the program maintain employment and graduate at a rate of over 90%.

Post-secondary educators are moving the Finger Lakes forward.

  • Rochester Institute of Technology (RIT) Electronic Assembly Training program trained 10 veterans and 10 dislocated workers in 20 days to enter the electronic assembly industry.

The community is moving the Finger Lakes forward.

  • Catholic Family Center, Action for a Better Community, and Community Place of Greater Rochester have partnered to offer two adult mentoring programs to the community.”

The data provides no useful information to evaluate the effectiveness of the region’s workforce development efforts because it does not measure outcomes/impacts of specific programs or kinds of assistance, (i. e, how many training participants were able to secure employment in the field for which they received training).  Given this, it isn’t possible to know how much impact the initiatives have had on worker skill deficits in the region or do any measurement of costs and benefits.

Another portion of the Implementation Agenda section, “Higher Education, Research, and Healthcare Work Team presents a series of charts described as performance indicators.  Several of the charts[23] appear to show that the region is not meeting goals but offer no discussion of the data or how the region intends to address the failures. In  other cases charts present data that is not relevant to the goal in the chart title.  For example, The first chart presents “Goal 1 – increase enrollment” in regional colleges and universities:

The data shows that enrollments have declined by about 5,000 over the 2011-2015 period.  Clearly, this goal is not being achieved.  But, the text provides no discussion of this issue, or how it might be addressed. Instead, the reader is provided with six pages of project descriptions, like the one below. None of the items provide specific information about which priority goal is being addressed, what specific strategic goal related benefit is to be derived, or a status description showing progress to a specific goal.  For example:

The Chart, “Goal 2: Increase R&D” similarly shows that R&D has been declining in the Finger Lakes Region since 2011.  Again, no discussion of the data is presented, nor is a specific strategy to remedy the shortfall identified.

 

 

The chart labelled, “GOAL 4: Increase STEM Graduates” is supposed to show area progress in increasing the number of STEM (Science, Technology, Engineering and Mathematics Graduates), But, the chart doesn’t measure change in the area’s ranking, or in the number of STEM graduates over time.  Even the static data that is presented doesn’t show which year the data is taken from.

Evidence Based Policy Implementation

The Governor’s regional planning and grant program could potentially provide a rich source of data for regional and state decision-makers to measure project impacts, evaluate what works and what doesn’t, and to use the information to guide future actions.  The Evidence Based Policy Making Collective[24] provides useful guidance as to how an effective implementation and evaluation could work.  The Collective argues for this process:

Monitor program delivery

      • To clearly define the key components of a program model and track the inputs, activities, outputs, and outcomes of program service delivery through process evaluation and performance management
      • To check whether services are delivered as intended, in terms of both quantity and quality, and whether programs are meeting their goals

Use impact evaluation to measure program effectiveness

      • The systematic collection of information about a program to identify (or estimate) the specific contribution of that program to intended outcomes
      • That specific contribution, in the language of evaluators, is known as a program’s impact5…

A process by which measurable goals are specified, and relevant data is collected and evaluated is essential to understanding the real impacts of programs and to making informed decisions about program continuation or termination.  Unfortunately, that process does not exist in the Governor’s regional planning and funding competitions.

Since State and regional decision-makers are operating in the dark about the specific contribution to the intended strategic outcomes of the projects that received more than $4 billion in funding provided by state taxpayers, to strengthen future decisions, much improved definitions of project goals and appropriate impact measures are absolutely necessary.  If the Governor’s regional partnership initiative is to continue, it is imperative that the state mandate substantial improvements in data reporting, performance analysis and evaluation.

Conclusion

The Finger Lakes, since 2000, has been hard hit by the collapse of employment at several large manufacturers.  Because relatively few jobs remain at these companies, the region has less concentrated risk of losing jobs at one or a few companies.   At the same time, the Finger Lakes region has had faster service sector growth than other upstate metropolitan areas west of Albany-Schenectady-Troy, available data suggests a strong entrepreneurial culture, and strong knowledge-based industries, all of which could strengthen its future employment growth.

The region’s strategic economic development plans and annual reports are concerns, though.  The plan has an unrealistic view of the potential for manufacturing employment, particularly optics, photonics and imaging, to create regional employment growth, while giving short shrift to those service industries that are growing.

Of equal concern is the total absence of any kind of outcome/impact measurement or program evaluation.  This weakness is not unique to the Finger Lakes strategies and reports.  Several regional economic development strategies and reports have the same weakness. For example, see the Central New York Region Report:

Given the $4 billion that has been spent of the regional economic development grant competitions, the Governor and legislature should mandate effective impact measurement and evaluation as a condition of participation in the next round of funding.

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[1] “NEWYORK OPEN FOR BUSINESS – Seneca County CCE.” 14 Nov. 2011, http://senecacountycce.org/resources/finger-lakes-redc-strategic-plan. Accessed 20 Jun. 2018.

[2] “Top Optics, Imaging & Photonics Companies – Greater Rochester ….” http://www.rochesterbiz.com/Portals/0/Top%20Optics%2C%20Photonics%2C%20and%20Imaging%20Companies%20in%20the%20Greater%20Rochester%2C%20NY%20Region%2C%202018.pdf. Accessed 20 Jun. 2018.

[3] “Fate of local jobs uncertain after Xerox, Fujifilm announce merger.” 31 Jan. 2018, https://www.democratandchronicle.com/story/money/business/2018/01/31/fuji-xerox-fujifilm-merger-cost-savings-jeff-jacobson/1081916001/. Accessed 20 Jun. 2018.

[4] “GM Corporate Newsroom – United States – Company – GM Media Site.” 4 Jun. 2018, http://media.gm.com/media/us/en/gm/company_info/facilities/component-fac/rochester.html. Accessed 20 Jun. 2018.

[5] United States Department of Commerce, Bureau of Economic Analysis, Regional Economic Accounts, https://www.bea.gov/itable/iTable.cfm?ReqID=70&step=1#reqid=70&step=1&isuri=1

[6] Author’s calculations from BEA data.

[7] Department of Labor, Bureau of Labor Statistics, Current Employment Statistics.  https://www.bls.gov/data/

[8] Source:  U. S. Census Bureau, County Business Patterns.

[9] The practice of making grants directed by the legislature later returned, see:  https://www.empirecenter.org/publications/inside-albanys-secretive-slush-fund/ and https://www.politico.com/states/new-york/albany/story/2015/10/partisan-spoils-persist-in-new-legislative-earmark-program-026317

[10]“A New State Government Approach to Economic Growth” https://regionalcouncils.ny.gov/sites/default/files/2017-12/2011-redc-guidebook.pdf

[11] “Competition Guidelines:  New York Urban Revitalization Initiative, April 2015” https://regionalcouncils.ny.gov/sites/default/files/2017-12/2015-uri-guidebook.pdf

[12] Finger Lakes Progress Report 2017, p. 8.  https://regionalcouncils.ny.gov/sites/default/files/2017-12/2017ProgressReportFingerLakes.pdf

[13] Department of Labor, Bureau of Labor Statistics, Current Employment Statistics.  https://www.bls.gov/data/

[14] Employment change from 2010-2017.

[15] Most recent available data from 2017 Finger Lakes Progress Report, op cit.

[16][16] “Top Optics, Photonics and Imaging Companies in the Greater Rochester, NY Region, 2018”  http://www.rochesterbiz.com/Portals/0/Top%20Optics%2C%20Photonics%2C%20and%20Imaging%20Companies%20in%20the%20Greater%20Rochester%2C%20NY%20Region%2C%202018.pdfyujg8hni6rthuj76i  Number adjusted to reflect more recent Xerox employment from Rochester Democrat and Chronicle, op. cit.

[17] https://en.wikipedia.org/wiki/Photonics

[18] http://www.aimphotonics.com/what-is-integrated-photonics/

[19] “Finger Lakes 2015 Upstate Revitalization Initiative Plan,” https://regionalcouncils.ny.gov/sites/default/files/2017-12/2015-finger-lakes-uri-plan.pdf

[20] “A New State Government Approach to Economic Growth,” op. cit.

[21] See, for example, “2016 Annual Jobs Report on ESD’s Loan and Grant Programs,”  https://esd.ny.gov/sites/default/files/2016-Annual-Jobs-Report-Final.pdf

[22] 2017 Finger Lakes Progress Report, p. 25.

[23] 2017 Finger Lakes Progress Report, p. 31

[24] https://www.evidencecollaborative.org/principles-evidence-based-policymaking




Reconsidering “Lost Manufacturing Jobs – The Effects of Imports and Increased Productivity”

In a post examining the causes of the decline in manufacturing employment over the past fifty years, I concluded, like other analysts, that although increases in imported manufactured products had caused part of the decrease, most of the drop resulted from productivity increases from automation and process improvements.  See for example: https://www.nytimes.com/2016/12/21/upshot/the-long-term-jobs-killer-is-not-china-its-automation.html.

Because of the emphasis on the idea that manufacturing has seen sharp productivity gains, much of the discussion about the future of manufacturing employment has focused on the perceived threat of automation. For example, a recent OECD study, “Automation, Skills Use and Training,” by Ljubica Nedelkoska,  and Glenda Quintini estimates that “Across the 32 countries, close to one in two jobs are likely to be significantly affected by automation, based on the tasks they involve. But the degree of risk varies. About 14% of jobs in OECD countries participating in PIAAC are highly
automatable (i.e., probability of automation of over 70%).”  But, the impact of automation appears to be slowing.  Manufacturing productivity growth has stagnated since the recession of 2008-10.

More recent research has challenged the focus on productivity increases as the primary cause of manufacturing employment declines.  Daron Acemoglu, David Autor, David Dorn, and Gordon H. Hanson concluded in Import Competition and the Great U.S. Employment Sag of the 2000s,” that between two and two million, four hundred thousand jobs were lost to Chinese competition between 2000 and 2011. They point out that “the coefficient estimates imply that had import competition from China not increased after 1999, trade-exposed industries in local labor markets would have avoided the loss of 2.35 million jobs.”

A new study, “Understanding the Decline of U. S. Manufacturing Employment,” by Susan N Houseman of the Upjohn Institute for Employment Research shows that a statistical artifact drove much of the apparent productivity growth.  She found that “Since the 1980s, however, the apparently robust growth in manufacturing
real output and productivity have been driven by a relatively small industry—computer and electronic products, whose extraordinary performance reflects the way statistical agencies account for rapid product improvements in the industry. Without the computer industry, there is no prima facie evidence that productivity caused manufacturing’s relative and absolute employment decline.

Houseman notes that in accounting for the output of computer products, the government recognizes that “The semiconductors embedded in our electronics are much more powerful today than they were a decade or even a year ago. Likewise, the computers and related devices that consumers and businesses buy today have much greater functionality than in the past….The rapid output growth in this industry does not necessarily imply that American factories are producing many more computers, semiconductors, and related products—they may be producing less. Instead, it
reflects the fact that the quality of the products produced is better than in the past. The statistical agencies adjust price deflators for other products, such as autos, for changes in quality. However, the effects of quality adjustment in other industries on aggregate statistics, to date, have generally been small compared to those of the computer industry.” (p. 11)

On the surface, measuring worker productivity would seem to be simple since the definition of productivity is output per work hour, and the Department of Commerce’s Bureau of Economic Analysis provides information about employment and industry output.

Many of the analyses of the decline of manufacturing employment, including mine, looked at the inflation adjusted value of manufactured products over time and compared that with the number of workers employed in manufacturing them.  When they discovered that the value of output per worker had increased, they attributed the change to increases in productivity.

Instead, Houseman shows that the output of products per worker in manufacturing, except for the computer industry,  has grown at about the same rate as the overall economy.   The growth of the value of manufacturing output as measured by the Bureau of Economic Analysis is associated with product quality improvements, not increases in the volume of products manufactured.  The chart below, which illustrate’s Houseman’s point, is from “Trade vs. Productivity: What Caused U. S. Manufacturing’s Decline and How to Revive It,” by Adams Nagar, Information Technology and Innovation Foundation, February, 2017.

Growth of Real Value-Added Per Worker in Computer and Electronic Products, the Rest of the Manufacturing Sector, and the Rest of the Economy, 1998–2015

As a result, Houseman concludes, “once the anomalous effects of computer industry are excluded, even descriptive statistics provide no prima facie evidence that higher rates of automation were primarily responsible for the long-term decline in manufacturing’s share of employment. Rather, they suggest that understanding the reasons for the slow output growth in manufacturing output—whether from weak growth in domestic demand, strong growth in imports, or weak growth in exports—is critical.”(p. 19)

The last eight years have seen a cyclical recovery in manufacturing employment that has been weaker than the employment recovery in service providing industries, with the largest increase coming from the recovery of the auto industry after the Federal bailout.  Manufacturing employment has grown overall by 10.2%.  Motor vehicle manufacturing employment grew by 47%.  During the same period, private sector growth in the United States has been 17.5%.

To date, the Trump administration has focused on business tax reductions and tariff policy to encourage employment growth.  The stimulative effects of the tax policy changes are likely to support continuation of the post recession recovery, but will confront monetary policy restraint from the Federal Reserve as inflationary pressures build.

A discussion of the administration’s tariff approach is beyond the scope of this research, but it carries significant risks associated with the possible growth of trade wars, as well as trade-offs from higher prices for imported goods.

The loss of manufacturing employment has damaged to the economy, particularly for workers with low educational attainment and few job skills, since jobs with few educational and skill requirements in the service sector generally pay less.  Since it is clear that imports have played a major role in the decline of manufacturing in the United States, policies that help manufacturers are appropriate responses at the federal, state and local levels.

Among the more significant options available at the state and local level are support for skills training, manufacturing process improvement assistance from programs like the Manufacturing Extension Program, programs to encourage technology transfer and commercialization, and those to encourage entrepreneurship.  Additionally, streamlined regulatory and permit processes can help manufacturers seeking to locate or expand.

But, it should also be understood that manufacturing employment is a small percentage of total employment, and that government policy responses will not fully erase the significant wage differentials that have led manufacturers to produce their products outside the United States.  For that reason, rational economic development policies should also focus on encouraging the growth of service sector industries.

 




Upstate’s Uneven Metropolitan Economies – Implications for Policy Makers

  • The story of New York’s job market since the 1990’s has been a tale of two regions.  The New York City metropolitan area, where two-thirds of the state’s population lives, has seen private sector employment growth (42.4%) that is near the national rate (48.3%).
  • Albany-Schenectady-Troy’s employment growth – 27.5% – is much higher than the remaining New York state metropolitan areas.
  • Job growth in central and western upstate New York, and in other rust belt metropolitan areas, has lagged.  Buffalo’s job growth during the period was 7.9%, while the Syracuse and Rochester metropolitan grew by 4.7% and 10.6% respectively.   Utica-Rome grew 3.9%, while Binghamton lost 14.1% of employment in goods and services.

Much attention has been paid to the fact that inflation adjusted worker earnings[1] have stagnated nationally since 2000, after growing from $49,000 in 1970 to $58,670 in 2000.  In 2016, real earnings per worker were $56,900 in the United States.  But the fortunes of metropolitan areas have differed.

  • Real earnings per worker in the New York City metropolitan area grew substantially- from $57,800 to $78,300 between 1970 and 2016. Inflation adjusted earnings also grew in Albany-Schenectady-Troy and Syracuse.
  • Rochester and Binghamton saw declines during the period.
  • In 1970, all New York metropolitan areas (except for Utica-Rome) and metropolitan areas in total in Ohio and Michigan had higher earnings per worker than the United States.
  • By 2016, every metropolitan area, except New York City, had earnings that were lower than for the United States.  Much of the worker earnings slippage can be attributed to the loss of manufacturing jobs.

Because the state’s economic performance has been uneven, it is not surprising that New York and its localities spend heavily on economic development.

  • Empire State Development’s 2017-18 budget was eight times larger than in 2012-13 ($2.768 billion compared with $335 million)[2].
    • Ohio’s economic development corporation, JobsOhio reported expenditures of $96 million in 2017.
    • Michigan Economic Development Corporation’s budget was $54 million in that year.
  • Timothy J. Bartik of the W. P. Upjohn Institute for Employment Research reported that as of 2015, New York’s state and local tax incentives as a percentage of the state’s private industry value added were second highest in the nation.[3] Only New Mexico spent more.
    • New York’s high spending on incentives occurred despite the fact that the state’s business tax burden as a percentage of private industry value added was about average.
  • The 2017 Annual Report on New York State Tax Expenditures show that at the state level, $1.4 billion in economic development tax incentives were issued.[4]

Some economic development efforts have paid off, as companies that have received assistance have created and retained jobs.  But, despite those successes, the employment performance of central and western upstate metropolitan areas, like other rust belt metropolitan areas continues to significantly under-perform the nation’s.

The state’s investments have not lifted job creation in central and western New York above other rust belt communities because economic and technological changes are stronger than the tools available to the state to encourage the creation and retention of jobs. When Eastman Kodak drastically downsized after its consumer film business was destroyed by digital technology, no amount of state assistance could have prevented the resulting job losses.  When labor cost disadvantages led New Process Gear division of Chrysler Corporation to close its factory near Syracuse, and Carrier to move manufacturing operations, the tools available to encourage the companies to stay were simply not enough to make up for the cost differences.

Given those challenges, it is reasonable to ask how economic development strategies for upstate New York metropolitan areas should be structured.  To answer that question, we must start by understanding the changes in the performance of industries that make up regional economies like those in upstate New York.  Because, if we do not understand those changes, we risk allocating resources to efforts that are unlikely to succeed, or which provide a smaller return on the state’s investment than might be received from alternatives.

This post is one of a series presenting data that describes changes in New York’s regional economies and show how those changes might inform state decisions about how to best use resources in the effort to help industry create and retain jobs.  It begins with a look at employment and earnings data since 1970, and then focuses on the more recent 2001-2016 period.

New York’s Differing Metropolitan Economies

New York state is most often seen as consisting of two regions – the New York City metropolitan area, with about two-thirds of the state’s population – and  upstate New York.  But, the upstate/downstate distinction is not as significant from an economic perspective as the difference between areas in the eastern part of New York State, ranging from Albany-Schenectady-Troy through Poughkeepsie into the New York Metropolitan area and the areas west of Albany, such as the Utica-Rome, Syracuse, Binghamton, Rochester and Buffalo metros.  What differs about these two regions is the historic dependence of central and western New York on manufacturing compared with the service sector-based metropolitan areas in eastern New York.

The economic performance of New York’s metropolitan areas has differed significantly in earlier and later time periods.

  • Between 1970 and 1989, Albany-Schenectady-Troy, Rochester, Syracuse and Binghamton had the strongest employment growth in the state.
  • Buffalo-Niagara Falls, Utica-Rome and New York City lagged.  Beginning in 1989, Binghamton began a sharp decline, ending up, by 2016 losing 12% of its employment.
  • In the same year, growth in Syracuse and Rochester began to slow as well, with each of those regions showing little growth since them.
  • The New York City metropolitan area began a period of rapid growth in 1995, moving from last place to first place by 2016.

The Decline of Manufacturing

The divergence in performance between the eastern region of the State and central and Western New York that began about 1990 reflects the region’s dependence on manufacturing.

  • Nationally, in 1970, 26.7 percent of goods and services employment was in manufacturing[5].
  • In the rust belt outside New York, 35% of employment was in manufacturing industries[6].
  • The Binghamton, Rochester, Utica-Rome and Buffalo metropolitan areas had greater percentages of employment in manufacturing than the aggregate of rust belt metropolitan areas outside the state in 1970.
  • The New York City, Albany-Schenectady-Troy and Syracuse metropolitan areas had smaller percentages of manufacturing employment than rust belt metropolitan areas outside New York.
  • In two metropolitan areas in 1970, Rochester and Binghamton, more than four of every ten jobs were in manufacturing industries.

By 2017, manufacturing employment nationally fell to 7.1% of goods and services employment in the United States.  In rust belt metropolitan areas outside New York State, manufacturing employment was 11.8% of goods and services employment.

  • By 2017, every metropolitan area in New York state had a smaller percentage of goods and services employment in manufacturing than rust-belt metropolitan areas outside the state.
  • New York’s metropolitan areas west of the Hudson Valley were more dependent on manufacturing than the nation in 1970 and saw larger declines in manufacturing as a percentage of non-farm employment than the rust belt metropolitan areas outside New York State.
  • Four of five metropolitan areas in central and western New York had higher percentages of manufacturing employment in 1970 and larger declines in manufacturing as a percentage of non-farm employment than metropolitan areas in rust belt states excluding New York.

Manufacturing Employment Losses

Nationally, manufacturing employment has decreased by 5.5 million jobs since 1970.

  • Manufacturing employment declines in the United States began in the 1980-1990 decade, reaching a peak of nearly six million jobs lost between 2000 and 2010.
  • One of every three manufacturing jobs in existence in 2000 was gone by 2010.
  • From 2010-2017, manufacturing employment has shown a modest increase – 7.9%.

Metropolitan areas in Central and Western upstate New York saw a loss of 270,000 manufacturing jobs between 1970 and 2017.

  • Since 1990, 150,000 jobs were lost in these metropolitan area.
  • Percentage losses in these New York metropolitan areas for each decade were larger than for the United States.

Service Sector Employment Change

Because most employment in each metropolitan area is in the service sector, overall employment changes depend primarily on service sector employment change.  Since the percentage of total employment in service sector industries has grown substantially since 1970, the correlation between overall employment change and service sector employment change has grown.

At the national level and in New York State metropolitan areas as a group, in every decade except for the 2000 to 2010 period, service sector employment growth was great enough to more than offset the losses in manufacturing employment. In those decades where there was manufacturing employment growth at the national level, service sector growth was far greater.  For example, between 2010 and 2017, manufacturing employment grew by about 900,000, but service sector job growth was almost 14,000,000.

In the New York City metropolitan area, service sector growth has accelerated since 2001.

  • In upstate New York, service sector employment grew after 2000 in Rochester, Albany-Schenectady-Troy, Buffalo-Niagara Falls and Syracuse, but at slower rates than in the New York metropolitan area.
  • Binghamton and Utica-Rome have seen no service sector employment growth since 2000.

Employment Change: 2001-2016

Economists divide the productive portion of the economy into two categories – goods producing[7] and service providing[8].  In this section the employment change in industries providing goods and services from 2001 to 2016 in New York State metropolitan areas is compared with metropolitan areas in two neighboring rust belt states – Michigan and Ohio.

Overall, the employment performance of the metropolitan areas in this group was significantly weaker than the increase for the United States, which grew by 21.1%.

  • For metropolitan areas in New York, Ohio and Michigan, the median employment change was 3.3%.
  • For New York state metropolitan areas, median growth was 4.4%.

Since 2001, differences in employment performance between the Hudson Valley and upstate-west reflect the differences in manufacturing employment losses and service sector employment gains.

  • The New York City metropolitan area, where two-thirds of the state’s population lives, has seen private sector employment grew more than the national rate (28.6% vs. 21.1% for the nation as a whole), and 40% more than the rate for rust belt metropolitan areas outside New York State.
  • Albany-Schenectady-Troy’s employment growth – 13.3% — is almost two thirds of the national rate.

Job growth in central and western upstate New York, Michigan and Ohio rust belt metropolitan areas, has lagged the nation, in most cases, with most metropolitan areas growing at one-third the rate of the nation, or less.

  • Twelve of fourteen metropolitan areas in Ohio and Michigan and all the upstate central and western metropolitan areas grew at this rate or less.
  • Buffalo’s job growth was 7.1%, while the Syracuse and Rochester grew by 4.4% and 3.3% respectively.
  • Utica-Rome lost 1.7%.
  • Binghamton lost 7.2% of employment in goods and services.

The period from 2001 to 2010 ended in the great recession that began in 2008, while the 2010-2016 period was one of economic recovery.  Because the two decades saw sharply different economic performance, they are examined separately in the following sections.

Employment – 2001-2010

Goods and services employment in the United States increased by 5% between 2001 and 2010.  During that period, most rust belt metropolitan areas saw employment decreases.

  • During the 2001-2010 period, most metropolitan areas in New York State were less affected by the recession than rust belt metros in Ohio and Michigan.
    • Employment in the New York City metropolitan area increased by 9.2% during the period, while Albany-Schenectady-Troy increased by 3%.
    • Buffalo-Niagara, Rochester, and Syracuse had small employment declines, ranging from 0.7% for Buffalo-Niagara to 2.5% for Syracuse.
    • Utica-Rome lost 3.4% of goods and services employment.
    • Binghamton was hardest hit in New York, losing 6.4% of its employment compared with 2001.

Employment in most rust belt metropolitan areas in Ohio and Michigan was harder hit between 2001 and 2010 than it was in New York State, with more than half losing more than 5% of goods producing and service providing jobs.

  • Six metropolitan areas – Toledo, Canton, Detroit, Dayton, Youngstown and Flint lost more than one in ten jobs.
  • Much of the region’s loss of employment can be attributed to employment declines in the automobile and related industries.

Manufacturing vs. Service Employment Change – 2001 to 2010

Between 2001 and 2010, 725,000 manufacturing jobs were lost in the New York, Michigan and Ohio metropolitan areas studied, while 870,000 service sector jobs were gained.  But, the balance between manufacturing losses and service sector gains was heavily influenced by the New York City metropolitan area.

  • Of the 870,000 increase in service sector jobs, 679,000 jobs were in the New York metropolitan area, leaving only 190,000 in the remaining metropolitan areas.

Excluding New York City, the data shows that metropolitan areas outside New York state were more affected by the balance of manufacturing job losses and service sector gains than those in New York.

  • Metropolitan areas in Michigan and Ohio lost 510,000 manufacturing jobs while gaining 110,000 service jobs.
  • In New York State, metropolitan areas other than New York City, 92,000 manufacturing jobs were lost, compared with 81,000 service sector jobs gained.

All the metropolitan areas in central and western upstate New York lost more manufacturing jobs than service sector jobs gained.  Albany-Schenectady-Troy and the New York City metropolitan area both gained more service sector jobs than manufacturing job losses.

Employment: 2010-2016

While New York’s metropolitan areas were less affected by the weak economic performance of the 2001-2010 period than those in Ohio and Michigan, most saw a significantly weaker recovery than those other metropolitan areas between 2010 and 2017.

  • Only New York City did better than the nation, with employment growth at 17.8%.
  • Albany, Schenectady, Troy also did relatively well compared to the group of metropolitan areas studied here, ranking eighth of twenty-one.

Job creation was relatively weak in central and western New York metropolitan areas between 2010 and 2016.

  • Only Youngstown performed as poorly as these New York metropolitan areas.
  • The strongest of the central and western New York group, Buffalo-Niagara Falls, saw an increase of 7.9% compared with the median for Michigan and Ohio metropolitan areas – 9.6%.
  • Two metropolitan areas were the weakest of the group. Utica-Rome’s employment increased by 1.7%, while Binghamton’s lost 0.9%.

Compared to Ohio and Michigan, metropolitan areas in New York followed differing paths between 2001 and 2010 and 2010 and 2017.

  • Eastern New York metropolitan areas New York City and Albany-Schenectady-Troy did relatively well in both periods.
    • The New York City metropolitan area’s growth exceeded the nation’s growth and far exceeded the rust belt’s performance in both periods.
    • Albany-Schenectady-Troy did relatively well in both periods, although its performance compared with the other metropolitan areas studied was stronger between 2001 to 2010 compared to 2010 to 2017.
  • In the 2010 to 2017 period, the performance of central and western New York metropolitan areas ranked lower compared to the group than in 2001 to 2010.
    • Central and western New York metropolitan areas had the weakest employment performance of all the metropolitan areas in the group.

Manufacturing vs. Service Employment Change – 2010-2016

Service employment growth dominated the 2010-2016 recovery.

  • For the metropolitan areas in New York, Michigan and Ohio studied, service employment increased by two million, compared with 144,000 manufacturing jobs.
  • The New York metropolitan area contributed half the service sector growth – 1.1 million.

Metropolitan areas in central and western New York state had an increase of 94,000 service sector jobs, compared with a loss of 3,400 manufacturing jobs.

  • Albany-Schenectady-Troy was the only bright spot for manufacturing jobs in New York State.
    • The data shows that the growth was about evenly split between semiconductor and biotechnology manufacturing.
  • Binghamton, the only metropolitan area in the group to lose jobs, lost 2,800 manufacturing jobs, compared with a gain of 2,245 service jobs.

Metropolitan areas in Michigan and Ohio saw larger manufacturing gains than those in central and western upstate New York.

  • Manufacturing jobs in Michigan and Ohio increased by 142,000, while service sector employment increased by 789,000.

Worker Earnings

Between 1970 and 2000 average inflation adjusted earnings grew much more in the nation (19.2%) than in any of the metropolitan areas in New York State, except for New York City, but between 2000 and 2016, the picture changed.

  • Neither the United States nor any of the metropolitan areas saw significant growth, apart from Albany-Schenectady-Troy.
  • Some, like New York City, Michigan and Ohio metropolitan areas in the aggregate, Rochester and Binghamton saw losses.

Unlike employment, inflation adjusted worker earnings did not show distinctive trends in the 2000-2010 period vs. the 2010-2016 period.

Because the mix of employment has shifted from manufacturing, with higher earnings per worker towards services, with lower earnings, average worker earnings today are lower than they would be if the employment mix in 2016 was the same as it was in 1970. 

  • For example, if manufacturing and services wages were at the same levels as in 2016, with the manufacturing/services employment mix of 1970, earnings per worker in the Rochester metropolitan area would have been 16% higher than they are.

In general, metropolitan areas that had the greatest shift from manufacturing to services saw the greatest earnings impacts.

  • Binghamton, the most affected, had a 30% decline in manufacturing’s share of goods and services employment.
  • Earnings per worker in 2016 were 33% lower than they might have been had manufacturing’s employment share not decreased, and manufacturing and service wages had remained as they were in 2016.

The relatively greater loss of manufacturing employment in the rust belt, including central and western upstate New York has affected worker earnings more than for the United States.

  • At the beginning of the period, most metropolitan areas in New York and rust belt metropolitan areas in Michigan and Ohio in total had annual worker earnings that were higher than for the United States.
  • By 2016, all but the New York City metropolitan area were below the United States.
  • Rochester’s average earnings per worker in 1970 were 12% higher than the United States average. By 2016, they were 11% below.
  • Binghamton was 6% above the United States average in 1970, and 23% below it in 2016.
  • Only New York City, with its service sector dominated economy and high average service sector wages remained above the average worker earnings for the nation in 2016.[9]

Conclusions

Employment growth in central and western upstate New York metropolitan areas was relatively strong from 1970-1990, but beginning in 1990 flattened out.  The New York City and Albany-Schenectady-Troy metropolitan areas were less dependent on manufacturing employment and showed stronger growth after 1990.

Employment performance in New York metropolitan areas was, in the 2001-2010 period, generally less affected by the recession than in metropolitan areas in Ohio and Michigan.  But, in the 2010-2017 period, only Albany-Schenectady-Troy and the New York City metropolitan areas in eastern New York performed at average or better than average levels compared to Ohio and Michigan metros.  Buffalo-Niagara Falls, Rochester, Syracuse, Utica-Rome and Binghamton were five of the six weakest performers among the metropolitan areas in New York, Michigan, and Ohio.

In every rust belt metropolitan area, manufacturing employment declined substantially between 2001 and 2010.  The best performing metropolitan area in the study, New York City, lost 110,000 manufacturing jobs, 38% of its 2001 manufacturing employment; the worst, Flint, lost nearly two-thirds.  During the 2010-2017 period, manufacturing employment recovered some of its losses in the earlier period, with more than half of the metropolitan areas in the studies gaining 10% or more.  Unfortunately, in New York State, only Albany-Schenectady-Troy saw significant manufacturing gains between 2010 and 2017.  Even so, the manufacturing gains in Albany were less than one-third the size of service sector employment gains.  The New York City, Rochester, Syracuse and Binghamton metros saw continued losses.

The comparative employment data examined here shows significant differences in the performance of metropolitan areas between 2001 and 2010 and 2010 and 2017. The differences are likely have resulted from several factors.  Manufacturing employment took a particularly large hit between 2001 and 2010 and has recovered slightly since then.  The historic dependence of many of the metropolitan areas in upstate New York, Ohio and Michigan on manufacturing made them more vulnerable to manufacturing losses than other places.  Import competition, technological obsolescence and productivity improvements were all factors, but had differing impacts on industries in the metropolitan areas in this study.

The average earnings of workers in rust belt metropolitan areas were higher than the nation in 1970 but are now lower.   Average worker earnings for the United States increased by nearly 20% between 1970 and 2000.  Average worker earnings in rust belt metropolitan areas in central and western upstate New York, Ohio and Michigan have been stagnant or declined since 1970.   Since 2000, average earnings at the national level and in rust belt metropolitan areas have not grown, with few exceptions.[10]

Why Rust Belt Metropolitan Areas Have Lagged

Much of the weak employment performance in Central and Western New York metropolitan areas, and in other rust belt locales is the result of their dependence on manufacturing.  The long-term decline in manufacturing employment nationally and in New York State has primarily been the result of efforts by manufacturing businesses to increase their competitiveness by cutting costs.  Though labor costs as a percentage of total production costs vary widely among manufacturing industries, they are important in almost all of them.

One means of reducing unit labor costs is through productivity gains from automation and process improvements.  Some analyses have concluded that more efficient production methods are responsible for as much as 88% of manufacturing employment losses over the long-term, though the effect the effect of this varies significantly by industry.[7]

The movement of manufacturers to locations with lower labor costs is another substantial factor in the decline.  In the twentieth century, rust belt states lost many manufacturing jobs to lower cost, non-unionized, locations in the south.  More recently, manufacturing jobs have moved offshore[27].

Over the longer term, research shows that the rust belt began to suffer in the 1950s because of the very large firms that dominated the region’s most important industries faced little product or labor competition.[11] As a result, workers received a significant wage premium, and industries had relatively low labor productivity growth rates, making them vulnerable to foreign competition.

Another recent study[12] found that “The sluggish job growth of many deindustrialized metropolitan areas was only partly due to the fact that these metropolitan areas specialized in the wrong industries…instead it came about primarily because these areas underperformed the rest of the nation with respect to the industries that they had.[13] Both of these analyses point to the fact that in slow growing areas, “the performance of the particular firms and plants in those areas and/or the relative unattractiveness of those areas to firms seeking to open, grow or relocate were the problem.[14]

In the late 20th century, the Northeast and Midwest lost manufacturing jobs to the South and West.  According to “Locating American Manufacturing: Trends in the Geography of Production, by Susan Helper, Timothy Krueger and Howard Wial,[15]This trend represented a shift of manufacturing jobs toward regions where right-to-work laws are more common, and, in the case of the South, toward a lower-wage region where generous industrial recruitment subsides have long been an important economic development policy tool.”  But, in the recent past, wage differentials between rust belt and Southern locations have declined and are less important in the face of competition from low wage countries.

The loss of manufacturing jobs in the decade from 2000 to 2010 was far larger (5,700,000 jobs) than any other decade in the 1970-2016 period.   While long-term analyses point to productivity gains as the main cost of lost manufacturing jobs, there is evidence that since 2000, offshore production has been the primary cause of lost jobs.  Daron Acemoglu, David Autor, David Dorn, and Gordon H. Hanson concluded in Import Competition and the Great U.S. Employment Sag of the 2000s,” that between two and two million, four hundred thousand jobs were lost to Chinese competition between 2000 and 2011. They point out that “the coefficient estimates imply that had import competition from China not increased after 1999, trade-exposed industries in local labor markets would have avoided the loss of 2.35 million jobs.[28] Manufacturing employment has rebounded slightly since 2010 – increasing by 700,000 jobs (6%) between 2011 and 2017.

In part, the cause of the poor performance of many rust belt metropolitan areas was insufficient industrial diversification.  Because they had high concentrations of manufacturing, these areas were vulnerable to technological changes and import competition that sharply reduced manufacturing employment over the past four decades.  In contrast, higher concentrations of service providing businesses in metropolitan areas like New York and Albany-Schenectady-Troy have protected them from the collapse of manufacturing employment that disadvantaged metropolitan areas that had been more dependent on manufacturing.

Many of the metropolitan areas in this study are small enough to be significantly affected by the loss of jobs at a few large businesses.  For example, the displacement of Kodak’s film business by digital technology cost the Rochester MSA 16,000 jobs of the 39,000 manufacturing jobs lost between 2001 and 2017.  No doubt more jobs were lost at Kodak’s suppliers.  Xerox in Rochester, Chrysler’s New Process Gear Division and Carrier in Syracuse had smaller but still significant impacts.

Service sector employment has grown slowly or declined in mid-sized and smaller rust belt metropolitan areas for several reasons.  First, a large portion of service sector employment serves other businesses and the population in its area.  When hundreds of thousands of manufacturing jobs disappeared in New York State, many service sector jobs were lost as a result.  Second, for advanced services, in some cases, rust belt metropolitan areas are too small to provide large labor pools with the specialized labor skills needed by industries like information and financial services.  Third, industrial consolidation has led to the loss of some corporate headquarters in small and medium sized metropolitan areas.  An example is the purchase of regional banks by megabanks, which became possible after the Glass-Steagall act was repealed.

Implications for State Policy

Traditionally, the goal of state and local economic development agencies has been to encourage businesses to locate or remain or expand within their jurisdictions.  Economic development agencies at the state level perform several functions, including providing financial assistance for purposes such as infrastructure development, urban revitalization and encouraging business investments within the state.  These agencies typically attempt to maintain and create jobs by providing financial assistance to employers to help them strengthen their work forces though training, or by providing tax incentives and/or financial assistance for capital investments.

Since they are business facing agencies, their approaches focus on factors that influence company location decisions, usually at the time that the companies themselves are considering those issues.  This perspective leads to policies that relate to the availability of sites, the costs of building and equipping facilities, and the availability of labor with appropriate skills.  There is little significant research that focuses on the effectiveness of different approaches.

However, available evidence does not support the notion that tax reductions, or the use of business incentives plays a significant role in creating jobs by increasing the demand for workers.  The largest recent study of the effects of tax reductions and business incentives found “The effects of net taxes, gross taxes and incentives are always statistically insignificant.”[16]  As the author points out, “Small variations in wages from place to place can offset the largest tax incentives offered by governments.  The highest incentives that are typically provided could be entirely offset by a competing area that had no incentives, but had labor that was 79 cents per hour cheaper in wages.[17]

When financial incentives are employed to encourage job creation, the most effective approaches provide significant upfront assistance and have short durations (because businesses heavily discount future benefits compared with near term subsidies) and include claw backs and first source agreements (targeting low income people).[18]

Because relatively few business capital investments involve attracting businesses from outside the state, most effort is focused on encouraging the modernization or expansion of existing operations.  During the time I worked at Empire State Development (from 1995-2007), the agency provided financial assistance to thousands of upstate companies for training and capital projects.  Many of these projects would not have taken place, at least at the same scale, without state assistance.  Although I’m not currently at ESD, much of what the agency does today reflects the same objectives and similar approaches to assisting businesses.

While ESD at the state level, and economic developers at the local level, aid service businesses as well as manufacturers, economic development agencies over the years have emphasized the retention of manufacturing as a primary strategy.  This has been a rational approach, since manufacturing jobs have several desirable characteristics: they are typically in industries whose products are sold outside New York state, thereby bringing income into the state; they have historically offered relatively high wages; and in many cases they did not require specialized skills.  Today, because of automation, manufacturing processes have changed, and factory jobs often require specialized skills.  There are far fewer manufacturing jobs now than there were twenty years ago. Though we may not soon see severe decreases, like those of the 2000-2010 decade, fewer than one in ten workers is now employed in manufacturing in most areas.

For those reasons, economic development efforts should reflect the reality that most job growth will continue to come from service sector businesses.  Primary economic development strategies for upstate metropolitan areas should work to strengthen regional service sector businesses that sell services outside the region. Efforts to retain manufacturers are equally important but must recognize that assistance to manufacturers to increase productivity may reduce the number of jobs at facilities but may help preserve those jobs over the longer term.

Encouraging new business development through entrepreneurship is another avenue that state economic development agencies can effectively promote.  Entrepreneurial assistance programs and business incubators, often aimed at disadvantaged groups and businesses, can increase successful business startups.

These activities represent short-term interventions that work within the longer-term context of the existing economic, cultural and demographic environments found where they operate.  But, while economic development agencies can incentivize company decisions in favor of a location, by providing financial assistance, facilitating other government actions, such as permitting, training or by coordinating with local agencies, they should also play a role in contributing to longer-term actions to strengthen regional competitiveness.

______________________________________________________

The contributions of time and insights by Merideth Andreucci, Kent Gardner, Amy Schoch, Robert Ward and Rockefeller Institute staff including James Malatras, who read earlier drafts of this piece, are gratefully acknowledged.

[1] The Bureau of Economic Analysis of the U. S. Department of Commerce definition: “Earnings is the sum of three components of personal income–wages and salaries, supplements to wages and salaries, and proprietors’ income.”  See:  https://www.bea.gov/regional/definitions/

[2] “Economic Development in the New York State Budget,” Citizens Budget Commission of New York, https://cbcny.org/research/economic-development-new-york-state-budget

[3]A New Panel Database on Business Incentives for Economic Development Offered by State and Local Governments in the United States,” Timothy J. Bartik, W. E. Upjohn Institute,  http://research.upjohn.org/reports/225/

[4] Includes $69 million in Research and Development Tax Credits.

[5] Data is from U. S. Department of Commerce, Bureau of Economic Analysis, Regional Economic Accounts Tables:  https://bea.gov/.  Most BEA data was taken from the Headwaters Economics Economic Profile System:  https://headwaterseconomics.org/tools/economic-profile-system/about/

[6] Metropolitan areas in Ohio, Michigan, West Virginia, Indiana, Illinois (except for the Chicago MSA) and Wisconsin. Chicago like New York City is excluded because its industrial composition has a small percentage of manufacturing employment.

[7] Agriculture, forestry, fishing, and hunting; mining; construction; and manufacturing.

[8] Utilities; wholesale trade; retail trade; transportation and warehousing; information; finance, insurance, real estate, rental, and leasing; professional and business services; educational services, health care, and social assistance; arts, entertainment, recreational, accommodation, and food services; and other services (except public administration).

[9] New York’s position weakened between 2000 and 2016 because of decreases in average earnings per worker in the financial services industries.

[10] One exception is Albany-Schenectady-Troy, where rising government employee earnings have benefited workers in the private sector, as market competition for workers reflects the opportunity for potential employees to take well paid government jobs.

[11] “Competitive Pressure and the Decline of the Rust Belt: A Macroeconomic Analysis,” Simeon Alder, David Lagakos and Lee Ohanian, National Bureau of Economic Research, Working Paper 20538, http://www.nber.org/papers/w20538

[12] “The Consequences of Metropolitan Manufacturing Decline:  Testing Conventional Wisdom,” Alec Friedhoff, Howard Wial, and Harold Wolman, Brookings Institution, Metropolitan Policy Program, https://www.brookings.edu/wp-content/uploads/2016/06/1216_manufacturing_wial_friedhoff.pdf

[13] Ibid, p. 15

[14] Ibid, p. 11.

[15] “Locating American Manufacturing: Trends in the Geography of Production,” Brookings Institution, Metropolitan Policy Program,  https://www.brookings.edu/wp-content/uploads/2016/06/0509_locating_american_manufacturing_report.pdf , p. 29.

[16] Timothy J. Bartik, “A New Panel Database on Business Incentives for Economic Development Offered by State and Local Governments in the United States,” p. 110.

[17] Bartik, 2009. “What Works in State Economic Development?” In Growing the State Economy: Evidence-Based Policy Options, 1st edition, Stephanie Eddy, and Karen Bogenschneider, eds. Madison, WI: University of Wisconsin, pp. 19.

[18] Ibid.

[19] NBER Working Paper No. 19843, The Quarterly Journal of Economics (2014) 129 (4): 1553-1623 http://ideas.repec.org/a/oup/qjecon/v129y2014i4p1553-1623.html

[20] Analogous to metropolitan areas but includes rural areas.

[21] https://regionalcouncils.ny.gov/

[22] https://www.governor.ny.gov/news/governor-cuomo-announces-more-755-million-economic-and-community-development-resources-awarded

[23] These include:  “Solar City: The Risk Embedded in Buffalo’s Billion,” John Bacheller, Policybynumbers.com,  http://policybynumbers.com/solar-city-the-risk-embedded-in-buffalos-billion ,

and “Nexgen in Syracuse: Throwing Good Money After Bad,” John Bacheller, Policybynumbers.com, http://policybynumbers.com/nexgen-in-syracuse-throwing-good-money-after-bad

[24] “America’s Advanced Industries:  What they Are, Where they Are, and Why they Matter,” Mark Muro, Johathan Rothwell, Scott Andes, Kenan Fikri, and Siddharth Kulkarni, Brookings Advanced Industries Project, F4.ebruary 2015, p.

[25] “Solar City: The Risk Embedded in Buffalo’s Billion,” op. cit.

[26] NBER Working Paper No. 19843, The Quarterly Journal of Economics (2014) 129 (4): 1553-1623 http://ideas.repec.org/a/oup/qjecon/v129y2014i4p1553-1623.html

[27] See:  “Import Competition and the Great U.S. Employment Sag of the 2000s,” Daron Acemoglu, David Autor, David Dorn,  Gordon H. Hanson, 2014.  http://economics.mit.edu/files/10590

[28] Ibid., p. S181.




Nexgen in Syracuse – Throwing Good Money after Bad?

Update:  Note that the Syracuse Post Standard carried the following article on January 4th:  http://www.syracuse.com/business-news/index.ssf/2018/01/ny_taxpayers_built_90m_factory_in_dewitt_for_firm_that_walked_away_didnt_create.html The article quotes ESD spokesman Jason Conwell.  “Conwall said the grant will be contingent on the company meeting its job commitments. Details of the grant’s terms will not be available until the grant disbursement agreement is executed later this month, but they will follow ESD’s standard practice of requiring companies to return a grant, or portions of it, if they fail to meet hiring milestones, he said.”  

Note that ESD General Project Plans, adopted by its Board, generally contain specific job and recapture requirements, and that the plan adopted by the Board in its December meeting does not.  However, as Conwell states, such a requirement could be included in the Grant Development Agreement, which both ESD and the company would sign.  If so, the action would address one of the issues in my commentary, below.

Recently, a news article in the Syracuse Post Standard, “Soraa walks away from $90M factory that NY built; $15M more brings new tenant,” described New York’s attempt to save its investment in a $90 million facility in Dewitt, near Syracuse, originally intended for Soraa, a manufacturer of LED lighting.  In addition to the facility, Empire State Development has awarded a $15 million grant to Nexgen, a power converter manufacturer.  Both the original agreement with Soraa and the construction of the facility, as well as the new grant to Nexgen contain highly questionable features that expose taxpayers to real, unnecessary risks, features that are common to a number of projects undertaken by the SUNY Polytechnic, SUNY Research Foundation and Fort Schuyler Management Corporation, a group of related state sponsored entities.

Soraa

In October, 2015, Governor Cuomo announced that Soraa, an industry leader in ultra-high performance lighting and LED technologies, will relocate its global manufacturing and research and development operations from California and overseas to SUNY Polytechnic’s Central New York Hub for Emerging Nano Industries. This move will create 420 new high-tech jobs in Central New York and is being made possible thanks to a $90 million state investment for the facility’s construction.”

The project, like the Solar City project in Buffalo that I examined in an earlier post, made the SUNY Research Foundation the owner of the facility being constructed. Like Solar City, Soraa was to be responsible for a $1 per year lease payment for the facility, and for shouldering operating expenses related to production.  In my earlier post, I pointed to a major problem with the model used in these projects:

  • “State taxpayers will be exposed to an unusually high degree of risk by the unprecedented structure of the SolarCity deal, under which Fort Schuyler Management Corp., a non-profit subsidiary of the State University’s College of Nanoscale Science and Engineering, is building the factory for the company, and will retain ownership. SolarCity’s up-front capital investment in the project is thus limited, weakening its incentive to remain in Buffalo after its dollar-a-year lease of the building expires in 10 years.”

This issue was present in the deal with Soraa, along with an additional problem – one which left the state’s investment exposed when Soraa pulled out of its deal with the SUNY Research Foundation.  SUNY’s deal with Solar City calls for graduated penalties if the company ceases production at the facility within the first 10 years after completion of the project.  The penalties would allow the state to recapture part of its investment of more than $750 million in the project if the company broke the lease during that time.  But, incredibly, SUNY’s deal with Soraa contained no recapture provision, leaving the state with no return on its $90 million investment in the building and equipment when Soraa decided not to go ahead with production in New York state.

Construction of the Soraa facility was delayed for a time because of the indictment by then U. S. Attorney for the Southern District of New York, Preet Bharara of Dr. Alain Kaloyeros, the head of SUNY Polytech, and of principals of Cor Development of Syracuse, on bribery, wire fraud, and other charges.

According to the Post Standard article, [Howard] Zemsky [Chairman of Empire State Development] said the delay may have been a factor in Soraa’s decision to abandon the local plant. But he said Soraa also is facing competitive pressures from Asian manufacturers. The company ultimately decided not to invest in the DeWitt plant.”

Nexgen Power Systems

The public was made aware of Soraa’s decision when Empire State Development’s Board of Directors approved a $15 million grant to a new occupant for the facility – Nexgen Power Systems.  On December 20th, the Syracuse Post Standard reported that

NexGen Power Systems, a startup company from California, plans to manufacture semiconductors for the electronics industry in the 82,000-square-foot plant in DeWitt, said Howard Zemsky, CEO of Empire State Development.

NexGen has promised to invest $40 million of its own in the facility and to create at least 290 jobs within seven years, state officials said. The company plans to move in sometime around the middle of 2018….

Despite the assurances of state officials, the NexGen deal has the same primary problem as  Soraa and Solar City deals, and some others as well.  Like the earlier deals, in the NexGen deal, New York State, through the SUNY Research Foundation retains ownership of the $90 million facility, leasing it to NexGen for $1 per year.  As a result, New York continues to bear the risk of ownership of the facility if NexGen does not continue to produce products at the Dewitt facility.

Although the Fort Schuyler Management Corporation website does not show an agreement with NexGen that describes its relationship with the company, Empire State Development’s website shows the General Project Plan for the $15 million grant that NexGen is receiving. While “Nexgen promises to employ 290 new full-time permanent employees within seven years of project completion,” the General Project Plan does not include a requirement setting the length of time the company must maintain the jobs or a provision for recapture of a portion of the value of the facility if the company leaves.  As a result, the employment commitment in the ESD grant appears to be unenforceable.  Also, though the Syracuse Post Standard quoted state officials as saying that “NexGen has promised to invest $40 million of its own in the facility,,,” The ESD Board materials contain no reference to any financial commitment by the company.

This raises another concern that is common to the projects undertaken by the SUNY Research Foundation.  Solar City, Soraa and Nexgen have relatively little company capital investment in their New York projects.  Because the state is providing essentially all of the capital costs of these projects, New York is getting very little leverage from the investment of State dollars.  This is in sharp contrast to prior state assistance to businesses – even for large projects like the semiconductor facility operated by Global Foundries in Malta – where ESD provided grants covering $650 million of the $3.2 billion capital investment (The company was also eligible for up to $600 mllion of Empire Zone benefits over 10 years).

Nexgen Power Systems – Company Risks

Nexgen is a startup company, and, there is little publicly available information concerning the production or distribution of established products.  In fact, the company’s website provides no specific information about the company’s financial resources or production capabilities.  Nor does publicly available information show that the company has received venture capital funding to support the $40 million that state officials say that it has promised to invest in operating costs related to production at the facility.

Press reports indicate that the company is a successor to Avogy, a failed startup, that produced laptop chargers that claimed to use the same gallium nitride technology that Nexgen promises to use in its Dewitt facility. One analysis (“Is Avogy Inc. Dead?” on PntPower.com) of Avogy’s failure pointed out, “Avogy developed a GaN/GaN power semiconductor device.  They own several patents in the field…But, according to all the people we discussed with, the distribution of these devices has never been large.”

According to Crunchbase.com, Avogy had received $40 million in a second round of venture capital funding in 2014 from Intel and Khosla Ventures, before disappearing in early 2017.  Court documents indicate that total venture funding for the company was $60,000,000.

Nexgen acquired Avogy’s intellectual property for $200,000. A report on Axios.com states that Khosla Ventures, the venture capital firm that had invested in Avogy, had sued Dinesh Ramanathan, the founder of Avogy and Nexgen.  The report states, “Vinod Khosla’s venture capital firm has sued the former CEO of a failed portfolio company, accusing him of fraud and extortion. But it’s not really about recovering the $60 million that Khosla Ventures invested, since that money is long gone. Instead, it’s about getting back at what Khosla believes is a duplicitous executive by exposing his alleged misdeeds.” The suit argues that Ramanathan engaged in self dealing by rejecting a slightly better offer for the intellectual property than his own bid, and attempted to illegally gain a cash payment from Soraa for the technology.

Nexgen’s website indicates that its core product is a laptop charger that is smaller and lighter than current devices.  The company claims to have switching technology that operates at higher frequencies than current silicon-based technology, reducing the size of inductors and capacitors in the circuit. The website describes the technology this way: “Avogy’s TrueGaN /XX platform…uses high frequency GaN switches in combination with a high efficiency circuit architecture, to enable at a fundamental level, the change required to build small power supplies, safely.”  In the past, gallium nitride based devices have been relatively expensive.

The charger is shown on a page on the Nexgen website that is not linked to the company’s home page.  Originally advertised at $99.95, the device is now available at $29.95 on Rakuten.com.  The charger is also sold on Amazon.com, where it has only three reviews, two of them negative, with comments about sparks and fire hazards.  Amazon.com indicates that the charger’s sales rank is 1,070 in the charger category.  It faces competition from FIXSix, which produces a similar small, laptop charger (FIXSix Dart).

While it was in business, Avogy produced a laptop charger through a subsidiary, Zolt, that claimed to use gallium nitride technology .  However, a teardown published on chipworks.com claimed that the charger used silicon technology, not Gallium Nitride.

The future prospects of Nexgen are unknown.  The company may continue to compete in the marketplace with a laptop charger that faces stiff competition from existing products.  It might also manufacture and sell power conversion semiconductors using its technology to product producers.  Whether it can succeed will depend on  a number of factors, including the advantages its technology offers, the price of its products, and its success in developing relationships with product producers and sellers.

Startup Companies and Venture Capital

When New York offered funding for the Global Foundries semiconductor chip fab it was dealing with an established company in an industry, because of the very large capital requirements and production expertise required, that has high barriers to entry.  But, barriers to entry are relatively low in other technology industries, like power conversion.  Additionally, investing in startup companies carries considerable risk, because the companies fail at relatively high rates. As a result, when New York acts as a venture capitalist, its investments carry high risks.

Startup companies often receive funding from venture capitalists, as Nexgen’s predecessor, Avogy, did.  Other sources include angel investors, and business incubators.  In these cases, investors get ownership stakes in the companies.  These investors generally participate in operational decisions of the companies that receive funding.  Financial, industry knowledge, marketing and networking expertise are generally provided.

New York, through the SUNY Research Foundation, does not provide the same kinds of assistance to the companies that it assists.  For example, the Memorandum of Agreement with Soraa made the Foundation responsible for constructing and equipping the facility for up to $90 million.  It also promised to help the company locate additional high technology jobs at the company’s contractors and suppliers in New York State, and to provide training for company staff.

Since New York State does not have an ownership interest in companies like Nexgen and Soraa, it has no real leverage to ensure that assisted companies will employ good financial practices, and is not offering to provide assistance in operational matters, such as developing relationships with product buyers and in product marketing.

As a venture capitalist, New York is in a relatively weak position, because it does not take ownership positions that would provide it some control over assisted companies, and has chosen to make large investments without finding partners to share risk.  By making large investments in a relatively small number of firms, the State’s approach increases the risk to its investments associated with company failures.

Conclusions

Soraa’s decision not to locate at the facility that New York had built for it in Dewitt left the state in a difficult position.  Because the state owns the building and equipment within it, it needed to find a tenant, to ensure that some return would be received on its investment.  Since the building had specialized design features and equipment intended for a company using gallium nitride technology, Nexgen appeared to offer a reasonably good solution to New York’s problem.  But, based on evidence now available, the state appears to be repeating mistakes that put it in the position of needing to find a tenant for a nearly $1o0 million facility.  Most importantly, while the Nexgen promised to employ at least 290 people at the facility, the General Project Plan adopted by Empire State Development does not specify the time period for which employees must be retained  and provides no penalties if the company does not meet its employment target.

At the same time, the State’s $105 million investment provides a very poor return on investment, based on the most optimistic assumptions.  The economic benefit of the project (tax revenues to state and local government plus net resident disposable income) according to Empire State Development’s Benefit-Cost evaluation is only 1.47 to 1, far below ESD’s benchmark for projects of 75 to 1.  The project’s fiscal (tax revenues to state and local governments) benefit cost ratio is negative: .12 to 1.

But, ESD’s benefit-cost analysis is not credible, because it assumes the project will maintain 290 new jobs over seven years.  Since the project plan does not contain any requirement for the period of time that jobs must be maintained, and since there is no recapture agreement in the event that jobs aren’t created, the analysis is based on an assumed set of circumstances that the agreement does not require the company to meet.

Finally, note that the decision to chase 290 high technology jobs in this case carries a high price tag – $105 million, an amount that is substantially larger than the amount ($86 million) that the region will receive in the coming year from the state’s primary regional economic development initiative – the 2017 Regional Council Competition.

New York, like other states has emphasized the pursuit of high technology companies as a key to the state’s future economic well-being.  In New York’s case, most of the state’s spending has been on high technology manufacturing, including the Global Foundries Chip Fab in Saratoga County, Solar City’s solar panel facility in Buffalo, Nexgen’s power converter plant in the Syracuse area, Norsk Titanium in Plattsburgh, and Danfoss Silicon Power near Utica.

But the price tag has been very high; several billion dollars in total, and other than Global Foundries, none of the facilities is expected to employ more than 500 people.  The long term prognosis for these facilities is also doubtful.  Over the past twenty years, employment in the electronics industry in the United States has cratered.  Employment at computer manufacturers in 2015 was less than 20% of what it was in 1998. Electronic component manufacturers employ 42% of the workers that they did in that year.  Semiconductor manufacturers employment is 45% of what it was in 1998.  In New York State, despite the opening of the Global Foundries facility in Malta, semiconductor manufacturing statewide is 17% lower (Source: U.S. Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School).

Perhaps it is time for policy makers to gain a better understanding which industries are growing nationally and in New York State, and to focus their attention on making sure that New York gets its share of national growth.  The state should also help existing businesses in New York compete by working with them to meet labor, facility and infrastructure needs.




Data, Key Punches, Blogging and the Upstate Economy

Fifty years ago, as a research assistant in graduate school at Syracuse University, I did some quantitative research for a professor on the effect of various factors on state policy outputs.

Technische Hochschule Aachen
Rechenzentrum

Doing the work required me find data in books in the university library and to go to a room in the university computer center, like the one in the illustration on the right, to put the data on cards using a key punch. Once the cards were punched, I gave the deck of cards to a member of the university’s computer staff. who then put them in a card reader connected to a computer.  On the computer, a statistical analysis program – SPSS (Statistical Package for the Social Sciences), provided the tools I needed to analyze my data.  Later, I would return to collect sheets of paper on which the results were printed.

The process was slow and cumbersome, involving hours of work to collect, input and analyze data.  Today, that data can be collected and analyzed in minutes on a laptop computer.  With the internet, I no longer have to comb through books from a specialized library, and with a personal computer, I no longer have to go to a central place to analyze data.

Information sharing is much easier, too.  In the past, if I wanted to share research data, I would have to find an institution that was willing to publish it – a process that sometimes required researchers to share in the cost of publication.  Today, the internet offers the possibility to reach readers directly.  Over the past two years, I’ve been able to publish more than two dozen research notes on my blog, reaching thousands of readers.

On this blog, I’ve written about data related to significant policy issues that face New York, particularly upstate New York.  As a long-time upstate resident, I am aware that much of the region, particularly those areas that were historically dependent on manufacturing, faces significant challenges in making it possible for residents to find good jobs that pay well.

While upstate New York faces the same challenges as the rest of the rust belt, its metropolitan areas differ from those in other rust belt places, such as Michigan and Ohio, because the impact of the loss of manufacturing has been less severe here.  Metropolitan areas like Buffalo, Rochester and Syracuse continue to have relatively affluent suburban populations, and overall have median household incomes that are near the national average.  Paradoxically, upstate central cities have among the highest poverty rates in the region, and several of the cities face fiscal distress.  The map, below, shows employment growth rates from 1998 to 2015 for economic regions in the Northeast and Midwest.  The weakest rates in the region are on a belt along the southern shores of the Great Lakes running from Wisconsin to Ohio.  Although Western and Central New York have done less well than much of the country, they have performed better than much of the Midwest.

Through my analyses, I’ve tried to strengthen policy discussions that focus on the decline of upstate cities and rust belt metropolitan areas, in order to avoid errors such as attributing most of the region’s decline to relatively high taxation levels, and misguided attempts to revive regional economies that create too much taxpayer risk by spending hundreds of billions of dollars to attract high technology businesses.  I’ve looked at the paradox of thriving suburbs and declining cities in New York’s metropolitan areas, and the growth of racial segregation upstate.  I’ve also provided data to help readers understand the real reasons why city schools are “failing.”

I’ve been happy to see that some of my pieces have been seen by a relatively large number of people.  Among the most popular have been:

The Decline of Manufacturing in New York and the Rust Belt, which has had more than 3,000 views.

As Private Sector Employee Incomes Stagnate, Local Government Workers Prosper, with more than 2,300 views.

New York’s Ineffective Business Tax Incentiveswith 1,600 views.

New York’s “Failing Schools” – The Wrong Diagnosis and a Misguided Solutionwith 1,300 views, and

The Crisis of Poverty in Upstate New York Cities, with more than 1,000 views.

In the coming year, I’ll be a Richard P. Nation research fellow the Rockefeller Institute at the University of Albany.  The fellowship will afford me the ability to work with other researchers on critical issues.  I also hope to work with the Institute’s staff to develop forums to discuss some of these issues and policies.  As a result, in the coming year, some of my research will be published on the Institute’s blog, or as research publications.  In those cases, I’ll be sure to provide links to that work on this blog.

In the past two years, much of the impetus for my work has come from accounts that I have read in various places on the internet, such as a story that appeared in the New York Times, “Spike Nation: Cheap, unpredictable and hard to regulate, synthetic marijuana has emergency responders scrambling to save lives.”, which contained the statement, “Syracuse is one of the poorest cities in America — more than a third of the people here live below the poverty line.”  Having lived in Syracuse in the 1960’s and 1970’s, I was aware that whenI lived there, that Syracuse was not one of the poorest cities in America.  The city had a mix of relatively poor and well-off areas.  That sparked my interest into researching what had happened to upstate metropolitan areas after I left Syracuse in 1971,  and led to several pieces on this blog.

Other pieces on this blog came from readers who asked questions about the proposed increase in the minimum wage, and about labor participation rates in upstate areas.  I hope that readers of this blog will continue to ask questions and offer their perspectives.  I may be contacted at  john.bacheller@policybynumbers.com.  

In the coming year, I plan to continue to look at labor participation and employment in New York State with a focus on disparities between cities and suburbs.  I’m also collecting data on city and town tax and revenue burdens and spending patterns to understand how they differ, and researching New York’s Regional Economic Development Council initiative to better assess strengths and weaknesses.  I also hope to take a look at some more data about student performance in New York schools.   I expect to publish findings via the Rockefeller Institute and on this blog in the coming months.

Illustrations are from Wikipedia.  Map is from: U.S. Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School.    http://www.clustermapping.us/region




President Trump to Upstate Residents: Move to Wisconsin

Recently, in an interview with the Wall Street Journal, President Trump suggested that upstate New York residents should leave the state for Wisconsin, where a new Foxconn LCD display panel manufacturing plant will be located, creating at least 3,000 jobs.  President Trump said, “I said, you know, Gary, you go to certain sections and you’re going to need people to work in these massive plants that we’re getting, that are moving in. Where do we have the people? You know where we have the people? In New York state that can’t get jobs, in many other places that can’t get jobs. And people are going to have to start moving. They’re going to move to Colorado and they’re going to move to Iowa and Wisconsin and places where – like if Foxconn goes to Wisconsin, which is one of the places they’re very strongly considering – but if Foxconn goes to Wisconsin and they have a very low rate and the governor’s done an excellent job, you’re going to have a situation where you got to get the people. But they’re going to start moving. And I’m going to start explaining to people when you have an area that just isn’t working – like upper New York state, where people are getting very badly hurt – and then you’ll have another area 500 miles away where you can’t – you can’t get people, I’m going to explain you can leave, it’s OK, don’t worry about your house.” Source, “Full transcript: Trump’s Wall Street Journal interview” Politico, August 1, 2017.

It is true that upstate employment performance has been weak, with most upstate metropolitan areas seeing decreases, while a few, like Buffalo, Glens Falls and Albany-Schenectady-Troy had small increases (Source – Bureau of Labor Statistics – Local Area Statistics). Many of the region’s smaller metropolitan areas had relatively large losses:  Binghamton, Elmira and Utica-Rome each lost more than 10% of its population.

On the other hand,   Median household incomes upstate were near the average for rust belt states, and the unemployment rate for upstate counties was the same as the national average in 2016: 4.9% in 2016 (Source: U. S. Department of Labor, Bureau of Labor Statistics, Local Area Unemployment Statistics).

The fact that the average unemployment rate in upstate counties is near the national average shows that the President’s statement, “You know where we have the people? In New York state that can’t get jobs…when you have an area that just isn’t working – like upper New York state, where people are getting very badly hurt,” is unfounded, given that unemployment upstate is no higher than the national average and that median household incomes are near it.  The labor force in upstate New York is stagnant or shrinking in most cases, but few labor force members are unemployed.  Upstate’s problem is not that its residents cannot find jobs, it is that the region’s population and workforce are stagnant or shrinking.

E. J. McMahon, in a recent New York Post op. ed., “Trump’s right, Cuomo wrong about the woes of Upstate” pointed out that many upstate New York counties are losing population.  McMahon argues, “From mid-2010 to mid-2016, nearly 194,000 people moved out of the 50 counties north of the New York City metro region — a net out-migration rate exceeded only by four states. Births and foreign immigrants made up some of the difference, but the total upstate population still dropped by nearly 60,000 people.”  McMahon’s statement is correct – many areas upstate have lost population since 2010 – in fact, 40 of 62 counties in New York State lost population between 2010 and 2016.

New York State is not unique in seeing population declines in some areas.  In Wisconsin, one of the places that the President said “they’re going to move to,” 36 of 70 counties saw population declines between 2010 and 2015.  In Ohio, included for comparison as another rust belt state which claims to have more business friendly policies than New York State, county populations decreased in 62 of 90 counties.

Since counties differ substantially in size within states, a better measure of the economic weakness of an area is the percentage of residents living in counties that are losing population.   In that respect, New York and Wisconsin performed similarly – in 2016, 13.2% of New Yorkers lived in areas with declining populations, while 9.2% of Wisconsin residents lived in declining areas.  In Ohio, 55.5% lived in declining population areas. Reflecting New  York’s regional divide, 61.3% of upstate residents lived in counties with declining populations, while none of the counties in the New York City Metropolitan area had declines.

(Table with full listing of counties is here:)

 

 

 

The data shows that population changes between 2000 and 2015 at the county level within New York, Wisconsin and Ohio varied significantly.  Like New York, Wisconsin and Ohio had counties that had significant population increases, and others that had large losses. Saratoga, Orange and Rockland Counties all had population increases between 2000 and 2016 that were greater than 10%.  New York’s least populous county, Hamilton, lost 15% of its population – a decrease of 834 residents. Wisconsin and Ohio saw similar variations. One county in Wisconsin had a 38% increase, while another lost 16% of its population.  In Ohio,  One county gained 75%, while another lost 10.5%.

“Business Friendly” Policies and Job Growth

E. J. McMahon argues in his New York Post piece that, “Trump, in effect, was simply prodding upstaters to act in their own best economic interests. …So, taxes aside, what advantages does Wisconsin offer over New York?….While Wisconsin Gov. Scott Walker has been an aggressive deregulator, New York’s regulatory climate in general is notoriously hostile to businesses. The 1970s-era State Environmental Quality Review Act, which has no equivalent in most states, hands a potent weapon to anti-development activists.”

Looking at New York, Wisconsin and Ohio from 2000 to 2015,  there is no evidence of consistent differences in performance that would reflect the effect of “business friendly” policies on job growth.  Instead, it shows that population and job growth vary substantially from local labor market to local labor market within New York State, and in Wisconsin and Ohio.  In each state, some areas are suffering, while others are doing relatively well.  New York had by far the strongest job growth overall between 2000 and 2015, but employment growth in New  York’s rural areas was the weakest of the three states.  Wisconsin’s performance was in the middle in both metropolitan areas and non-metropolitan areas, and Ohio’s was weakest in metropolitan areas, but stronger than New York’s in rural areas.

In a recent post, “Government Policies and Job Growth in the Rust Belt,” I showed that the relative performance of metropolitan areas over the rust belt differed substantially across time periods between 1990 and 2015.  If government policies, like “business friendliness” determined the economic performance of regions we would expect to see consistent advantages for states with states with business friendly attributes like low taxes or lax environmental regulation.  But, we do not.

Upstate’s relatively weak economic performance may be attributed to several factors  – most importantly, its past reliance on manufacturing employment.  In 1970, manufacturing employment was more than 40% of the private sector total in the Rochester and Binghamton metropolitan areas, and more than 35% of the total in Buffalo-Niagara Falls.  Today, in these areas, manufacturing employment is about 10% or less of the total.  In contrast, metropolitan areas that have had stronger growth recently, like New York City and the Albany-Schenectady-Troy metropolitan area, were less dependent on manufacturing.

Manufacturing Mega-Projects and Job Creation

Large manufacturing attraction projects, like the Foxconn plant in Wisconsin, the Solar City project in Buffalo,  and Global Foundries near Saratoga Springs cannot, in themselves be successful approaches to significantly improving the employment rate at the state level.

To encourage Foxconn to locate its facility in Wisconsin with a promise to create 3,000 jobs, the state agreed to provide three billion dollars in tax incentives and to waive environmental regulations  to allow Foxconn, without permits, to discharge dredged materials, fill wetlands, change the course of streams, build artificial bodies of water that connect with natural waterways and build on a riverbed or lakebed.Foxconn would also be exempt from having to create a state environmental impact statement, something required for much smaller projects.” Source: The Washington Post, “The Latest: Wisconsin Foxconn deal waives regulations,” July 28, 2017.

Projects that involve expenditures of as much as one million dollars per job are simply too expensive to replicate on a scale that would be large enough to meaningfully change  a regional economy.  New York’s employment was about 9,100,000 in 2016.  Increasing the state’s employment by even one percent – 91,000 – would cost ninety-one billion dollars at the cost of one million dollars per job for recent projects, assuming that enough large new job attractions were possible to enable that large an employment increase.  In fact, most job creation occurs at existing businesses, not at new facilities attracted because of government subsidies, while very few large manufacturing investments take place in a given year.

At the same time, the focus on attracting manufacturing is largely misguided.  Although manufacturing jobs are important, because they have higher average wages than jobs available to people without college educations in other sectors, manufacturing has been hemorrhaging jobs for forty years.  Mostly because of automation and productivity improvements, and less so because of import competition, manufacturing employment has sharply declined in the United States – from 20,000,000 in 1980 to 13,000,000 in 2016.   Between 2000 and 2015, New York lost 239,000 manufacturing jobs, while gaining 1,878,000 service sector jobs.  Ohio and Wisconsin also lost manufacturing employment, while gaining service sector employment. Because the growth of New York’s already strong service sector was particularly large – 25%, the state’s percentage job growth was much larger than the other states.

Because potential job growth continues to be likely to occur almost entirely in the service sector, focusing state resources on attracting manufacturing employment has a high opportunity cost.  Instead, policies and programs to support existing manufacturers in a region can be useful.

Upstate’s relative economic weakness is partly explained by the changing factors that drive location decisions in manufacturing and service industries. For manufacturers, upstate New York is a less attractive location than it once was because of factors including its location relatively far from the country’s population center, relatively high labor costs, difficult environmental permitting processes and relatively small and tight labor markets.  But, because manufacturing provides only about 10% of jobs upstate and nationally, manufacturing employment is a less significant economic driver than employment in other sectors is.

For high value added service industries, upstate New York suffers from relatively shallow labor markets, its relatively low percentages of college graduates compared to places like New York City and Boston, and the increasing concentration of industries in a few large companies headquartered in major cities.  Although the region has some significant strengths in higher education and health care, it has lost a number of corporate headquarters in financial services, because of the increasing concentration of the industry.

None of the problems faced by upstate New York, or for that matter, those parts of Ohio and Wisconsin that have stagnant economies, are easily resolvable.  But, leaders should recognize that the resurgence of these areas will not result from a policy of attracting manufacturing jobs to them – there are just too few opportunities to attract companies like Solar City, Foxconn or Global Foundries, and the cost is exorbitant.  Instead, leaders need to do what they can to anchor the companies in their area that have the potential to grow.  In most cases, those are service industries.  For these businesses, robust labor pools with appropriate skill sets are far more critical than the financial incentives or permitting issues that were critical to attracting large manufacturing facilities.




Response to Lost Manufacturing Jobs – The Effects of Imports and Increased Productivity

I’d like to thank Kay Wilkie, who serves on the United States Trade Representative’s Intergovernmental Policy Advisory Committee for offering useful comments concerning my post, “Lost Manufacturing Jobs – The Effects of Imports and Increased Productivity”  Kay points out that “It would be worthwhile to carefully examine and review the aspects of international trade and investment agreements, and US tax code, which favor the interests of Multinational Corporations over those of small and mid-sized US manufacturers and service providers.  Such provisions, and the paucity of trade development assistance to US exporting firms compared to OECD competition, serve to encourage US offshoring activities.”  

Kay also argues that “the emphasis should be on mechanisms to improve pay in poorly paying service sector jobs, in providing educational opportunity for everyone, on creating apprenticeship programs on a larger scale in sophisticated manufacturing, by better aiding dislocated workers and by assisting domestic firms impacted by adverse trade and technology trends.

Note that US trade policy, since the post WWII era, has been premised on foreign policy rather than trade balance interests: making our marketplace available to other countries’ exports to win adherents to the US vision of a world market economy.  Hence, US trade policy typically has not focused on bolstering the competitiveness and exporting interests of domestic industry.  Programs to offer technical and financial assistance to US-based firms have been paltry compared to our major trading partners, as US global dominance was assumed.

In the current context, trade in general, and imports are blamed for all job losses and economic ills.  Protectionist impulses abound, with false promises that implementing ‘Buy America’ policies and shredding trade pacts will magically restore jobs from a 19th or 20th century industrial economy – notably in coal, steel and heavy manufacturing. 

Missing from scrutiny has been any assessment of the comparative costs and benefits to the federal budget and US employment of the over-allocation of resources and trade protections to agricultural commodities, rather than technologies, manufactured products, and services sectors.  Arguably, US agri-businesses need less taxpayer support for their commodities exports than do our SMEs.

Another area worth examination: the impact of provisions in international agreements, notably investor-state dispute settlement, that protect the interests of multinational corporations over US-based employers.  Investment agreement provisions in some international agreements extend greater investor rights to foreign investors than those available to US investors via US federal, state and local courts, have redefined and constrained government regulation in the public interest at federal, state and local levels.   

Rather than rhetoric that misleads and harms US workers and firms, improvements to a Technology and Trade Adjustment Assistance Program could make a difference.  Since its inception by President Kennedy in 1962, when the US was running trade surpluses, Trade Adjustment Assistance (TAA) efforts have assisted US trade expansion objectives by mitigating the injuries to workers, firms and communities facing import competition.  TAA programs, however, have been supported in a reluctant and miserly way, with the program’s extension usually linked to approval of ‘fast track’ trade promotion authority.

The Trade Adjustment Assistance Program merits a significant redesign and relabeling as the “Technology and Trade Adjustment Program,” building on the expansion accomplished under ARRA in 2009-10 and providing sufficient funding to conduct nonpartisan research on the workforce impacts of technological advances confronting manufacturing and services industries in an increasingly competitive global context.   At a minimum, programmatic flexibility needs to adapt to varying states’ needs, and there needs to be effective outreach to impacted workers, employers and communities. A reinvigorated program would better redistribute a small portion of the national gains from technology and trade growth to dislocated workers and communities, might foster more public understanding of, and support for, investments in education, research, technology, and engagement in the world economy.”

 




Lost Manufacturing Jobs – The Effects of Imports and Increased Productivity

The decline in manufacturing employment in the United States has caused a wrenching economic adjustment, as one path to relatively well paying jobs has narrowed, particularly for workers without college educations.  As the percentage of workers in our society who work in manufacturing industries decreases, and lower paying service employment has increased, wages have stagnated.

The causes of the decline in manufacturing employment have been hotly debated. President Trump promoted the idea that product imports are a major cause of the shift away from manufacturing employment.  There is certainly common-sense evidence to support this position.  Clothing that was sold in the 1960’s with labels like Levi’s and L. L. Bean were largely made in America.  Major television manufacturers, like RCA and Zenith also produced most of their products in this country.  And, most people drove Chevrolets, Fords, and Plymouths that were made in America.

But, there is a significant counter-argument.  Several studies have shown that increases in worker productivity from automated production processes have significantly reduced the number of employees required to produce manufactured products.  One recent New York Times headline proclaimed, “The Long-Term Jobs Killer is Not China.  It’s Automation.”[1]  The article goes on to argue, “Donald J. Trump told workers…that he would bring back their jobs by clamping down on trade, offshoring and immigration.  But economists say the bigger threat to their jobs has been something else:  automation.”

This post examines industry based employment and shipment data along with trade data to evaluate the import and automation arguments.

The Impact of Imports on Manufacturing Employment

 To understand the impact of imports on manufacturing employment, it is first necessary to know the value of goods shipped by manufacturers located in the united states, and the value of manufactured goods imported during the period examined.   In this post, I examine data from 1963 to 2015.

Manufactured Imports

 The data shows that manufacturing imports have significantly increased since 1963 to 2015, from 2.6% of the total of domestic plus imported manufacturing goods to 25.3%.  But the extent of import penetration varies significantly among manufacturing industries – from a low of 6.9% of food products, to 63.9% of textiles and apparel.  For apparel alone, 86.3% of goods shipped or imported were imported in 2015.[2]

 Manufacturing Employment

In 1963, manufacturing employment was 17,035,000.  By 1987, the number had increased to 20,935,000.   But since then, manufacturing jobs have consistently declined, reaching 12,320,000 in 2015.  Total displacement of domestic manufacturing employment associated with import penetration grew gradually over the 50+ year period, reaching 4,179,000 by 2015 – one third of current manufacturing employment in the United States.

The impact of import penetration varied significantly by industry.  Materials related industries, like wood products, foods, chemicals and petroleum were relatively unaffected by import penetration, while durable product industries, like machinery, transportation equipment and electronics saw high employment impacts.  Of the sectors examined, clothing and apparel lost the most domestic employment – nearly 1.8 million jobs.  Electrical and electronic products,  including computers and other high technology devices, had the greatest increase in foreign jobs for import production – almost one million jobs between 1963 and 2015.

The Impact of Productivity on Manufacturing Employment

Several studies have shown that automation and process improvements have made manufacturing significantly more efficient than in the past.  Thus, many manufactured products are significantly less expensive today than in the past, in real terms.  How large an impact has the substitution of imported manufactured goods had on manufacturing employment in the United States?

The data shows that productivity increases have had a very large impact on manufacturing jobs.  The value of domestically produced manufacturing shipments more than doubled between 1963 and 2015, in real dollars.  Thus, without productivity gains we would expect employment to substantially increase.  But, it hasn’t – in fact manufacturing employment is only 58% of what it was in the peak year – 1987.  About 4,000,000 of the lost jobs can be accounted for by import substitution, but many more (28,000,000) were estimated to be lost as the result of increased productivity.[3] Thus, imports have caused the loss of only 13% of total manufacturing employment losses, compared with 87% for productivity growth.

Full size table:  Click here:

Implications

The data shows that both import substitution and productivity gains have cost manufacturing jobs, but that increased productivity has been a far more significant cause of the decline in manufacturing employment.  Without the effects of import substitution and productivity gains, an estimated 44,000,000 domestic employees would be required to produce the goods made and imported to the United States in 2015.[4]  Productivity gains are estimated to have led to the loss of 28,500,000 jobs based on productivity at 1963 levels, and import substitution is estimated to have cost 4,179,000 jobs.

It is important to note that imports and productivity increases have substantially benefitted most U. S. residents, because they have resulted in significantly lower prices than would have been the case without the substitution of automation and more efficient processes for labor, and of lower cost foreign workers for better compensated American workers.  Since 152,000,000 people are employed full and part-time in the United States, and only 12,000,000 are employed by manufacturers, most people are better off than they would have been without productivity gains and import penetration.

There is no overall benefit, or practical method, to reverse the job losses that have occurred because of manufacturing automation and process improvements.  But, there is some potential benefit to addressing trade imbalances, though the benefits would be quite small in the scheme of things – an increase in the share of the workforce employed in manufacturing industries of a few percent, at most. A recent McKinsey Report, Manufacturing the Future:  The Next Era of Global Growth and Innovation,[6] points out that

“Policy makers must also be realistic about what they can achieve with manufacturing industry strategy…. Manufacturing has changed in ways that make approaches that are aimed primarily at large scale job creation in advanced economies increasingly ineffective and costly at a time of tight government budgets…. Manufacturing can continue to grow and contribute to value added and export growth…[and] create new jobs – but not in the volumes or at the same skill levels as seen in previous decades.”

Some approaches, such as the imposition of tariffs carry trade-offs that most likely exceed their potential benefits, both because they increase the prices of imported goods, and because they invite retaliation.  Others, like the proposed Border Adjustable Tax on businesses bear closer examination, since they would have the effect of shifting the net burden of taxes from exporters to importers.[5]  Also worth considering are questions of currency manipulation, and whether American producers have fair access to markets in nations that export to the United States.

Government policies to promote manufacturing should look beyond trade balances if they are to have significant impacts. Government has several tools available to encourage manufacturing, ranging from setting the regulatory environment, including labor, capital market and general business regulations, to enabling growth ‘with hard and soft infrastructure investments, educating and training a skilled workforce, supporting R&D and basic research and upgrading highways and ports.”[7] It can also provide investment support and shape demand through public purchasing and regulation.

Finally, given the reality that manufacturing employment is likely to continue to stagnate, most future employment growth will be in the service sector.  For that reason, emphasis should be on mechanisms to improve incomes in low paid service sector jobs. Here, government can use its regulatory powers to provide low skilled workers who lack power in the job market with tools like minimum wage policy and rules that promote collective bargaining rights.[8]  It can also provide better access to relevant post-secondary education for young people, and for workers needing retraining, and by providing direct aid to displaced manufacturing workers.

[1] https://www.nytimes.com/2016/12/21/upshot/the-long-term-jobs-killer-is-not-china-its-automation.html

[2] Data Sources:  Import Data – Statistical Abstract of the United States, various years: http://www.census.gov/library/publications/time-series/statistical_abstracts.html

Exports & Imports by NAICS Commodities:  https://usatrade.census.gov/data/Perspective60/Dim/dimension.aspx?ReportId=7028

Manufacturing Shipments:  Statistical Abstract of the United States- Various years:  http://www.census.gov/library/publications/time-series/statistical_abstracts.html,  U.S. Census Bureau – “Value of Manufacturers Shipments for Industry Groups,” various dates: https://www.census.gov/manufacturing/m3/index.html

[3] Producer Price Index data is from the Federal Reserve Bank of St. Louis:  https://fred.stlouisfed.org/series/PIEAMP01USA661N

Employment data is from the Statistical Abstract of the United States, various years, and from the U. S. Department of Labor, Bureau of Labor Statistics – Current Employment Series –  Table B-1a. Employees on nonfarm payrolls by industry sector and selected industry detail, seasonally adjusted – https://www.bls.gov/web/empsit/ceseeb1a.htm, various years.

[4] Note that without the lower prices that result from import substitution and productivity increases, prices would be significantly higher, and actual product demand significantly lower than estimated.

[5]For discussions see:  https://taxfoundation.org/house-gop-s-destination-based-cash-flow-tax-explained/

and pp. 10-11 of:  https://www.americanprogress.org/wp-content/uploads/issues/2010/12/pdf/auerbachpaper.pdf

and,https://www.washingtonpost.com/posteverything/wp/2016/12/30/my-take-on-the-republicans-new-interesting-corporate-tax-plan/?utm_term=.570520155032

[6] For a comprehensive review of manufacturing policy issues, see “Manufacturing the Future:  The Next Era of Global Growth and Innovation,” McKinsey Global Institute – McKinsey Operations Practice:  http://www.mckinsey.com/business-functions/operations/our-insights/the-future-of-manufacturing

[7] McKinsey, Ibid.

[8] Like other approaches, these policies carry trade-offs, since they can encourage employers to substitute automation for human labor.




Economic Stagnation and Electoral Discontent in the Rust Belt

Readers of this blog know that I have been describing changes in employment in New York State and the rust belt associated with the loss of manufacturing employment in the nation.  The loss of 5,500,000 manufacturing jobs since 1970 has slowed employment growth in the region as a whole.  As a result, upstate cities, along with other small and medium sized cities in the rust belt have seen little overall job growth.

manufacturine-job-loss

The more significant impact for rust belt residents has been on employee earnings.  Many metropolitan areas in the rust belt saw declining earnings per employee between 1970 and 2014. In one metropolitan area, Flint, Michigan, earnings per employee are nearly 33% lower than they were in 1970.  Ann Arbor, Binghamton, Lansing and Youngstown earnings per employee were more than 10% lower in 2014 than in 1970.

In the most recent presidential election,we saw major shifts in voting patterns in traditionally Democratic voting rust belt states, with Donald Trump, the Republican presidential candidate, making large gains, particularly in smaller cities and rural areas.  His gains have been portrayed as resulting from economic stagnation in the region. Commentators have highlighted the contrast between employment and income growth in more prosperous large, coastal cities like New York and stagnation in smaller communities.

Earnings per Employee

The United States Bureau of Economic Analysis publishes data on employment by industry, along with industry earnings.  The Bureau defines “Earnings ..[to be] the sum of three components of personal income–wages and salaries, supplements to wages and salaries, and proprietors’ income.”

The data shows that while large cities in the rust belt saw significant growth in earnings per employee between 1970 and 2014, employees overall in medium and small metropolitan areas in the region had stagnant or declining earnings during the period. Earnings per employee in the Boston metropolitan area increased from $48,163 to $73,147 (52%) and New York City metropolitan earnings per employee increased by 40% from $55,923 to $78,232.

While large cities prospered, the median increase in real earnings per employee for the 32 Rust Belt metropolitan areas in New York, Massachusetts, Pennsylvania, Ohio and Michigan was only 2.2% over the entire 30 year period. Fourteen of 32 metropolitan areas saw decreases in earnings per employee over the 44 year period. Flint, Michigan had the second highest earnings per employee of the 32 metropolitan areas in 1970, and had the lowest in the group in 2014, decreasing by 33%. Earnings per employee in Youngstown, Ohio decreased from $50,107 to $42,981 – 14.2%.

earnings-per-capita1970-2014

More recently, between 2000 and 2014, growth in earnings per employee in rust belt metropolitan areas between was virtually non-existent, overall – only 0.2%.  Real earnings per employee declined in 15 of 32 metropolitan areas.  Metropolitan areas in Michigan saw disastrous losses in earnings per employee because of problems in the automotive industry – Detroit lost 14%, Ann Arbor lost 17%, and Flint lost more than 24%.

earnings-per-employee20002014

Employment Growth

Although many rust belt metropolitan areas showed employment growth during the 1970 and 2000 period, growth between 2000 and 2014 was much weaker. Between 1970 and 2000, the median metropolitan area goods producing and service providing employment increased by 42%. Cities in the heart of the rust belt, like Grand Rapids and Ann Arbor Michigan showed the largest employment increases, while several metropolitan areas in New York State, including Binghamton, New York City and Buffalo-Niagara Falls lagged.

emplchg-2970-2000

During the current century, between 2000 and 2014, median employment growth in rust belt metropolitan areas was only 2.5%.  Twelve of 32 metropolitan areas saw losses in goods producing and service providing employment.  Flint lost nearly 11% of jobs during the period, while Binghamton lost almost 13%.  At the same time, some areas, including New York City, Philadelphia, Boston and Columbus saw employment growth of more than 10%.

employchg20002014

Impact of the Shift from Manufacturing to Services

In some large cities – New York City, Boston and Philadelphia, despite the shift from manufacturing employment to services, earnings per employee have remained high – even increased.   In these cities, earnings per service employee were relatively high in 2014- more than $65,000 in each case.  But in many smaller cities, like average earnings per employee for service sector jobs averaged less than $40,000, compared with $60,000 to $80,000 per employee for manufacturing.  Smaller cities were also harmed by the fact that in most cases, manufacturing employment losses were a higher percentage of total goods producing plus services providing employment.

Overall, rust belt metropolitan areas have seen significant shifts in employment from substantially higher paying manufacturing jobs to lower paying service jobs.  The Syracuse metropolitan area lost 37,800 manufacturing jobs between 1970 and 2014.  Manufacturing jobs in Syracuse averaged $76,700 earnings per employee.  The area gained 134,000 new service sector jobs, averaging $46,200.

 

earnings-employ-impact

For a larger version of this table click here:

Implications

Many parts of the rust belt – particularly small and medium sized metropolitan areas – have not seen the prosperity enjoyed by large cities on the East and West coasts.  Outside the major cities, the growth of real earnings per employee has been insignificant – typically about 2% over the 44 year period.  Between 2000 and 2014 real earnings growth was virtually non-existent.  Worse, 14 of 32 metropolitan areas saw decreases in real earnings per employee.  Between 2000 and 2014, 15 metropolitan areas saw declines.

Employment growth was substantially lower between 2000 and 2014 – typically 2.5% over the 14 year period, than the 42% increase in the 30 year period between 1970 and 2000.  The region has endured a long period of economic stagnation, one that is largely the result of the loss of relatively high paying manufacturing jobs, and their replacement with lower paying service positions.

The primary cause of the lackluster performance of medium and small metropolitan areas in the rust belt was their dependence on manufacturing.  Because manufacturing was a larger share of medium and small rust belt metropolitan areas economies, automation and global markets resulted in larger job losses than in areas with more diversified economies.  In some cases, residents of rust belt metropolitan areas are on average significantly worse off than they were in 1970.  In most other metropolitan areas, earnings have stagnated for decades.

The appeal of a Presidential candidate who promised to “Make America Great Again”, and to address perceived threats to rust belt residents’ well being with simple sounding solutions like imposing tariffs on foreign producers, and by controlling immigration from locations that are perceived to have taken jobs from workers in the rust belt should not be surprising.  In contrast, many rust belt residents found that Secretary Clinton’s theme, “Stronger Together,” and policy positions lacked focus.  The problem for the victorious candidate, however, is that ending the rust belt’s economic stagnation is likely to be more difficult than his proposed solutions suggest.




The Decline of Manufacturing in New York and the Rust Belt

In a recent post I looked at employment changes in New York’s metropolitan areas and compared their performance with other metropolitan areas in the rust belt.  I found that change was inconsistent between cities in each state, and over different time periods.  I argued that industry mix probably was the primary cause of the differing results.

Here, I look at the decline of the manufacturing sector and its impact on employment change in New York State metropolitan areas.  Overall, rust belt metropolitan areas in this study have 4,500,000 less manufacturing jobs today than they did in 1970, compared with 28.4 million private sector workers in that year.  Overall, 1.2 million fewer people were employed in manufacturing in New York State in 2014 than in 1970, equal to 12.8% of the private sector employment total in 1970.  In two metropolitan areas (Binghamton and Utica-Rome), manufacturing job losses were about one-quarter of private sector employment in 1970, while in Buffalo and Rochester the manufacturing losses were about 20% of the total.

The loss of manufacturing jobs created a significant drag on job growth in the rust belt, and explains much of the growth of income inequality in the United States since the middle part of the last century.  Manufacturing jobs provided working class people with relatively high incomes.  Today, the opportunities that manufacturing provided to people with high school educations have sharply declined.

picture1

Rochester provides a good example of the impact of the decline in manufacturing.  The chart above shows that in 1970, 152,000 people in the Rochester worked in industries in the manufacturing sector, with average earnings of $68,000 (in today’s dollars), compared with the regional average private sector earnings of $53,200.  In 2014, 61,800 people worked in manufacturing industries in the area, with average earnings of $74,500, compared with regional average private sector earnings of $51,400.  The loss of nearly 100,000 jobs paying significantly more than the regional average has large impact on Rochester and other rust belt metropolitan areas.

State Level Changes

picture2

In this section, aggregate data for all metropolitan areas each rust belt state is examined.[1]  The data shows that while overall employment change in metropolitan areas was inconsistent over time, that between 1970 and 2014, manufacturing showed a larger decline in New York State than in metropolitan areas in other rust belt states.  New York metropolitan areas have lost 75% of the manufacturing jobs that existed in 1970.  Other rust belt states lost between 35% and 63%.  (Note that in the data, there is a discontinuity between the years 2000 and 2001, reflecting the change from the Standard Industrial Code Classification System and the North American Industry Classification System, which removed some industries from the manufacturing sector. As a result, the long-term data charts and tables exaggerate the change that took place between 2000 and 2001.  For that reason, shorter term charts and tables exclude the 2000-2001 data).

picture3

(In the chart above, blue shaded cells performed better than the median for metropolitan areas)

Dividing that data into periods reflecting economic boom-bust cycles, there were significant differences in the relative performance of manufacturing in state metropolitan areas across economic cycles.  However, manufacturing employment in New York metropolitan areas decreased more than most metropolitan areas in other rust belt states in most periods. Only in the 2007-2009 recession did it outperform the rust belt median.[2]  Between 1970 and 1976, between 1992 and 2000, and between 2001 and 2007 manufacturing employment performance in New York metropolitan areas was the worst of the seven rust belt states.

Because more than two-thirds of New York residents live in the New York City Metropolitan area, the very large decrease in manufacturing employment in that area has had a disproportionate impact on the decline of manufacturing in the state.  But, while upstate metropolitan areas had smaller percentage decreases in manufacturing employment that the New York Metropolitan area, they were more dependent on manufacturing.  As a result, the loss of manufacturing jobs in those areas did more economic harm to them than the losses in the New York City area.

Despite the large losses in manufacturing employment, each metropolitan area in New York State has shown some private sector employment growth since 1970, but the growth has been uneven.  This data also makes clear that changes in manufacturing jobs are not the only factor driving employment change in metropolitan areas.   Because so much employment is now in service sector industries, the performance of industries within the service sector has had substantial effects on the relative ability of metropolitan area employment to withstand the declines in manufacturing employment.

Manufacturing Employment in New York’s Metropolitan Areaspicturea

As in other rust belt metropolitan areas, manufacturing employment in New York State metropolitan areas decreased during most periods.  The patterns of the declines varied, with some metropolitan areas, like Rochester and Binghamton, doing quite well in the 1970’s and 1980’s but going into steep declines in the late 1980’s and 1990’s.  Others, like Utica-Rome performed quite poorly in the 1970’s and 1980’s but performed better than other New York MSA’s in more recent periods.  New York City’s manufacturing employment losses were consistently larger in percentage terms than average.  In all the periods, every metropolitan area in New York State lost manufacturing employment, with the exception of the 2009-2015 period, where Albany-Schenecady-Troy gained 16%, and Buffalo-Niagara Falls gained 3.1%.pictureb1

picturec1

While there were losses in manufacturing employment in each metropolitan area in each decade except the present one, the patterns of losses varied.  New York City, Utica-Rome  and Buffalo-Niagara Fall had losses that were greatest between 1970 and 1990.  Binghamton and Rochester saw the largest losses between 1990 and 2010.  Syracuse’s losses were largest between 2000 and 2010.  Employment changes in non-manufacturing sectors in different decades led to sharply varying results.  For example, despite losing 36,600 manufacturing jobs between 1980 and 1990, Buffalo-Niagara Falls had a net gain of 48,400 jobs during the period, because non-manufacturing employment increased by 85,000.  From 2001 to 2010, Buffalo-Niagara Falls lost 30,600 manufacturing jobs, but gained only 24,600 non-manufacturing jobs.  As a result, the area lost private sector employment in that decade.  Rochester and Syracuse also performed well during the 1970 to 1990 period but did poorly during the first decade of this century.  In contrast, The New York City metropolitan area lost employment during the 1970’s, but has steadily gained strength since then.

Since 2001, two New York metropolitan areas have shown significant private sector employment growth – New York City and Albany-Schenectady-Troy.  Buffalo, Rochester and Syracuse did not do well between 2001 and 2010, but showed significant recoveries from 2010 to 2014.  Binghamton and Utica-Rome had employment losses in the 2001 to 2014 period.

Percentage of Private Sector Employment in Manufacturing

pictured1

Overall, 1.2 million fewer people were employed in manufacturing in New York State in 2014 than in 1970, equal to 12.8% of the private sector employment total in 1970. New York’s metropolitan areas each had substantial declines in manufacturing employment between 1970 and 2014.  Binghamton lost the highest percentage (26.66%) of manufacturing jobs compared with its private sector employment in 1970.  Albany-Schenectady-Troy, which lost 8.1%, was the least affected.

picturee1

picturef1

Over the 44-year period between 1970 and 2014, manufacturing employment in New York State metropolitan areas both declined and converged.  Four metropolitan areas had significantly higher percentages of manufacturing employees compared to private sector employment in 1970 than the rust belt average:  Binghamton, Buffalo-Niagara Falls, Rochester, and Utica-Rome.  In 1970, more than four of ten private sector employees in the Rochester and Binghamton metropolitan areas were in manufacturing.  More than 35% worked for manufacturers in Buffalo-Niagara Falls and Utica-Rome.  Each of these metropolitan areas had larger decreases in the percentage of manufacturing employment than the average.  New York, and Albany-Schenectady-Troy had the lowest percentages of manufacturing employment in 1970 – 21.5% and 24.7% respectively, and had the smallest long-term declines – 18.7% and 19%. Note, however, that when metropolitan areas with similar concentrations of manufacturing employment are compared (see below), much of the difference in performance between New York metropolitan areas and other rust belt locations disappears.

In 2014, the areas with the highest percentages of manufacturing employment – Binghamton and Rochester – had only 11.4% and 10.9%. Only 2.9% of private sector employees in the New York metropolitan area and 5.8% of those in the Albany-Schenectady-Troy metropolitan area were employed in Manufacturing.  By 2014, only Binghamton, Rochester and Buffalo-Niagara Falls had higher percentages of manufacturing employment than the rust belt average.  The percentage of manufacturing employment in these two metropolitan areas exceeded the rust belt average by less than 2%, compared with 7% to 9% in 1970.

pictureng

Manufacturing and private sector employment change each varied substantially from decade to decade, but the relationship between the two was not constant.  Clearly, the decade from 2001 to 2010 was the worst decade for employment change in upstate New York, both for the private sector and for manufacturing.  On the average, more nearly one-third of manufacturing employees were lost during that decade, while overall, private sector employment declined by 1.7% on average.  From the perspective of manufacturing employment, 1980 to 1990 was the second worst decade in the period, but private sector employment had the second highest growth of the five time periods.  Rochester and Syracuse had the strongest private sector growth between 1970 and 1990, but showed little growth after 2000. New York City’s employment growth was the weakest in the state between 1970 and 1990 but among the strongest since 2001. 

Decreases in Concentration of Employment in Manufacturing Industries  

picturerrOverall, metropolitan areas[3] in the rust belt that had relatively greater percentages of private sector employment in manufacturing in 1970 lost a greater share of manufacturing employment than other areas with lower initial manufacturing employment concentrations. The data shows that metropolitan areas in New York State performed similarly to others with similar concentrations of employment in manufacturing industries. Buffalo, Rochester, Binghamton and Utica-Rome had both the highest concentrations of manufacturing employment and the greatest declines in the share of private sector employment in manufacturing.

picture1ss

Between 2001 and 2014, the relationship between manufacturing’s share of private sector employment and the decline in the manufacturing share of employment was weaker, but still present.  In general, areas that had higher concentrations of manufacturing employment in 2001 had greater decreases in the concentration of manufacturing employment than those with lower concentrations.  Once again, metropolitan areas in New York State generally performed in a similar manner to those in the rust belt outside New York having similar concentrations of manufacturing employment.

The data in both periods points to the steep decline in manufacturing employment from an average of more than three in ten private sector jobs to an average of one in seven.  With the decline came a convergence of manufacturing employment in metropolitan areas, with the range in the percentage of private sector employment in manufacturing ranging from about 20% to 40% in 1970, compared with 5% to 20% in 2014. 

Decreases in Manufacturing Employment and Concentration of Employment in Manufacturing Industries

picture123345

Here, the percentage decrease in manufacturing employment is compared with the initial share of private sector employment in manufacturing industries.  The data shows little relationship between these two factors.  Over the 1970-2014, and in the 2001 to 2014 period, metropolitan areas in New York State performed relatively poorly compared to others in the rust belt.  However, over the more recent period from 2001 to 2014, New York metropolitan areas, other than New York City saw percentage decreases in manufacturing employment that were closer to other rust belt cities with similar concentrations of employment in manufacturing.

picture1zzManufacturing Employment Concentration vs. Private Sector Employment Change 

picture1fff

In this section, the percentage of total private sector employment in manufacturing industries is compared with private sector employment change.  Between 1970 and 2014 overall, Albany-Schenectady-Troy had better performance than metropolitan areas with similar concentrations of manufacturing employment in 1970.  Syracuse and Rochesster were near the average.

picturedildo

Most metropolitan areas in New York State performed better in the 2001 -2014 period relative to other rust belt metros than they did in the longer term period, Binghamton being a notable exception.  The New York City metropolitan area had the best job creation performance of the rust belt metropolitan areas studied. Note also that the charts above show that when New York’s metropolitan areas are compared with other rust belt areas with similar concentrations of manufacturing employment, much of the apparent worse employment performance of New York metropolitan areas described in an earlier section disappears.

Over the 1970 to 2014 period, percentage decreases in manufacturing employment did not show an association with private sector employment change for the rust belt . However, metropolitan areas in New York State performed somewhat differently:  Areas with higher concentrations of manufacturing employment in 1970 showed less private sector employment growth than those with lower concentrations.  Similarly, in 2014, for the rust belt overall, there was not a significant relationship between the concentration of employment in manufacturing industries and private sector growth.  In that period, in New York State, areas with lower concentrations of manufacturing had greater private sector growth.   New York City had the greatest percentage growth in private sector employment during the period along with a low percentage of manufacturing employment.  Albany-Schenectady-Troy was another metropolitan area with relatively little manufacturing employment in 2001 and relatively high private sector employment growth.
  

Implications 

Since 1970, New York and the rust belt region have seen a substantial transition from high concentrations of manufacturing employment to lower ones.  In 1970, one third of all private sector jobs in the rust belt outside New York State, and more than 40% of private sector jobs in Rochester and Binghamton were in manufacturing.  In 2014, manufacturing employment in New York State metropolitan areas ranged from 2.8 to 11.4% of private sector jobs.  Since 2010, manufacturing employment has levelled off.  Whether this is a lasting change or a temporary stabilization after the very large manufacturing employment losses between 2000 and 2010 is not known.

This data shows that much of New York’s relatively large manufacturing employment loss resulted from the fact that a number of upstate cities had higher concentrations of manufacturing than average for the rust belt.  In New York, unlike metropolitan areas elsewhere in the rust belt, private sector employment growth appeared to be negatively related to the level of employment in the manufacturing sector.

All of the metropolitan areas in the rust belt were hurt by technological change, factory automation and the movement of manufacturing off-shore.  These trends reflect the continuing attempt of manufacturers to cut costs to be competitive.  In addition, the New York and the rust belt are no longer as good location to serve markets as they were when manufacturers in the United States primarily served domestic markets.  For those manufacturers that find it advantageous to serve domestic markets from the United States, the center of population has continued to move South and West.

Manufacturing employment losses in New York State had differing causes.  In Rochester, Kodak was initially threatened from foreign competition by Fuji, then saw its cash cow (film production) killed by the introduction of digital cameras.  In Syracuse, New Process Gear was closed by Fiat/Chrysler because of high labor costs.  Production continued at factories in Indiana and Tennessee, locations with lower labor costs and better geographic locations.  Carrier moved production of air conditioners from Syracuse to Tennessee, Texas, and Indiana (now being transferred to Mexico) for the same reasons.

Given transportation costs, the need for quick delivery of some products, and in a few cases technological leadership, some manufacturing continues in the United States.  In the competition to retain manufacturing, New York may continue to be handicapped by its location in the Northeast, its relatively high labor costs, and congestion in the New York metropolitan areas.

Future losses of manufacturing jobs have a smaller potential to harm regional economies because manufacturing employment is now only a small portion of private sector employment in the rust belt and New York State.  But, the loss of millions of relatively high paying jobs in manufacturing industries has had significant negative consequences for New York and rust belt metropolitan areas.

In New York, the decline of manufacturing has been a cause of private sector employment declines in places like Binghamton and Utica-Rome, and slow growth in Rochester, Syracuse and Buffalo-Niagara Falls.  And, though employee earnings are not the primary subject of this post, data from Rochester showed that the loss of 93,000 manufacturing jobs contributed to the stagnation in average private sector earnings in that metropolitan area, as well as greater earnings inequality.

In future posts I will examine employment change in service industries, and implications for metropolitan area wages.

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[1] The data for this post is from the Economic Profile System at www.headwaterseconomics.org  and the U. S. Department of Commerce, Bureau of Economic Accounts, Regional Economic Accounts.

[2] Periods were broken between 2000 and 2001 because of the change from the SIC to NAICS classification system, which creates a discontinuity because of changes in firms classified as manufacturers.

[3] Metropolitan areas included in rust belt comparison:  Illinois:  Champaign-Urbana, Chicago, Peoria, Rockford, Springfield; Indiana:  Elkhart, Evansville, Fort Wayne, Gary, Indianapolis; Massachusetts:  Boston, Springfield, Worcester; Michigan:  Ann Arbor, Detroit, Flint, Grand Rapids, Kalamazoo, Lansing; New York:  Albany-Schenectady-Troy, Binghamton, Buffalo-Niagara Falls, New York City, Rochester, Syracuse, Utica; Ohio:  Akron, Canton, Cincinnati, Cleveland, Columbus, Dayton, Toledo, Youngstown; Pennsylvania:  Allentown-Bethlehem-Easton, Erie, Harrisburg, Lancaster, Philadelphia, Pittsburgh, Reading, Scranton-Wilkes-Barre, York.