Thinking Arizona
Facts to Inform the Public Discourse
State’s Manufacturing Follows U.S. Decline
Dec. 1, 2011
Arizona lost one quarter of its manufacturing jobs in the space of a little more than a decade.
The starkness of this figure dispels any notion that the state’s Sun Belt allure somehow immunizes it from the manufacturing decline gripping the U.S. Since 2003, Arizona has been tracking downward right along with the rest of the country.
As those jobs go away, the foundation of the economy is metamorphosing from manufacturing to service – with uncertain consequences – just as it is across the U.S.
The economic slowdown, and the need to get things revved up again, are widely recognized. In recent years it has been the subject of numerous studies by the state’s think tanks, economic development agencies, the business schools of the state’s universities, and various do-gooder organizations such as Arizona Town Hall and the Flynn Foundation. Gov. Jan Brewer and the Legislature responded last winter by holding a special session to push through a comprehensive package of business incentives.
However, seldom are the specifics that are sapping the state spelled out. Manufacturing was once the 2nd largest employer in the state; it is now 9th.
The weakness of the sector is nothing new. Manufacturing has not kept pace with the growth of the state for a long time. The traditional core industries of manufacturing, mining and agriculture employed one of five Arizona workers in 1970. That fell to one in eight by 1990. In 2010, they employed only one in 14 workers.
More recently, the absolute number of jobs has gone into decline. Manufacturing peaked, at least from a jobs perspective, in 1998. Since then employment has fallen from 220,000 to 161,000 – meaning 59,000 jobs have vaporized. It’s the only sector of the state’s economy that suffered a decline in employment over the period of 1990 to 2010.
Conceptually at least, some portion of these jobs come and go with the ups and downs of the economy. In this case, though, the job level was falling even as the economy expanded early in the last decade and then got worse as the economy tanked.
All Jobs Are Not Created Equal
These are not any ol’ jobs. Manufacturing is core to the health of the economy because the wages are high and, even more vital, it suffuses the state with an ongoing supply of fresh cash in return for the goods it exports out of state.
This is in comparison to most jobs, which simply pass money that is already here from one hand to another. Without replenishment from outside, the re-circulated money eventually peters out. In the extreme, that’s what happens to a mining town when the mine shuts down. Without the outside income once produced by the ore, the town soon hosts only ghosts.
The state is certainly not in any danger of such misfortune. Nonetheless, the steady exodus of manufacturing raises two perplexing questions:
- What are the repercussions?
- What can be done about it?
The downhill slide in Arizona mirrors that in the U.S. Using 1990 as the base point, the index of take-home pay from manufacturing (figured on a per capita basis and adjusted for inflation) slid for both the state and the nation to 90 in 2003, to 80 in 2008, and then to 70 in 2010.
Despite the parallel trends, the slide is much more top of mind at the national level than it is in Arizona. Nationally, the loss of manufacturing gets at least a portion of the blame for the recession. With so much of the work moving overseas, it is driving wide-ranging concerns over unemployment, lower earnings, and the future of U.S. competitiveness.
Key Difference of Views
Conversely, the corrosive effects of the manufacturing decline get something of a pass in Arizona. Most of the blame for the local woes, which have cost the state 250,000 (8 percent) of its jobs in the past three years, is deservedly placed on the collapse of the overheated housing market. The construction industry added 190,000 jobs from 1990 to 2006, then promptly shed 140,000 of them.
The differing approaches may be attributable to the relative weight of each sector. In Arizona, construction had grown to be a bigger piece of the pie. The drop-off there was severe. Manufacturing, meanwhile, remained a somewhat bigger piece of the national pie.
Regardless, the difference in perspectives is laden with importance. The national view is directed at structural change in the economy. Manufacturing jobs have gone away and most of them will not be coming back. Replacing them will be difficult, if not impossible. By comparison, the state mostly blames its recent difficulties on the cyclical peaks and valleys of the economy. What goes up must come down, but will go back up again. The lost jobs will return when the economy rebounds.
The national view is the difficulty isn’t going away anytime soon. The state view is that this too shall pass.
Growth always has been the state’s foremost growth industry. The fast growth in population has fueled nearly equal fast growth in jobs. The addition of jobs in a wide variety of other sectors – from retail to local government – has drawn off much of the manufacturing sting.
However, jobs in the growth sectors do not pay nearly as well or have the same multiplier effect on the rest of the economy as do the disappearing jobs in manufacturing. The gross annual earnings for the average factory worker have grown to $80,000. The comparable figure for a store worker is $34,000.
With the latest reports on unemployment and factory output showing a little bit of life, one can hope some of the lost manufacturing jobs will reappear soon. Here though is something important to think about. To what extent will the portion of the losses that are permament either delay or suppress the recovery, and then go on to haunt the state in the long term? The answer may be hard to discern. Rather than being measured in precise terms, it will be felt in sluggishness.
The to and fro is described thusly by Tom Rex, the widely quoted economics researcher at Arizona State University:
“From the mid-1990s through the mid-2000s, the nation (and Arizona) experienced two artificial booms, first in the stock market, then in real estate. During the boom, a lot of jobs were created, but that was not sustainable. These jobs hid the effects of ongoing job losses in base activities, including manufacturing and call centers/customer support,” Rex says.
“If the state were to lose some of its export base and/or have that base shift to lower-paying export activities, then the prosperity of the state’s residents would suffer and the growth of the state would slow.”
Running in Place
Rex refers back to the statewide blueprint called Creating a 21st Century Economy: Arizona’s Strategic Plan for Economic Development, which recommended in 1992 that the emphasis in job creation be changed from growth in numbers to growth in quality. Twenty years later, we can see that the recommendation didn’t cause much to change.
The numbers continued to grow. Even with the effects of the downturn factored in, the state has netted out 1.3 million more jobs than it had in1990. The total is now 3.2 million* (see note at the bottom of this article).
But quality did not. One commonly used measure of “quality” is wages per capita. The better the jobs, the higher the wages. The good news is that pay in Arizona kept a bit ahead of inflation. Wages per capita (adjusted for inflation and stated in 2010 dollars) were $17,200 in 1970, $20,000 in 1990, and $23,800 in 2010.
Throughout, however, the state has lagged the nation. The difference fluctuates from 10-11 percent in the good times to 18-19 percent in the bad times. Stated in absolute terms (again in 2010 dollars), the annual gap has widened from $1,800 in 1970, to $4,600 in 1990, to $5,200 in 2010. That’s the bad news.
Now the newly created Arizona Commerce Authority, the cornerstone of the economic development package approved by the Legislature last winter, has taken up the battle. Its mandate is to be “even more aggressive” in attracting “quality jobs” to the state.
That’s not easy to do in the large numbers that are desired. Elliott Pollack, the head of the economic forecasting firm that bears his name, says one must be realistic. “The economy,” he says, “is a mighty big ship to turn.”
Generically speaking, the state can navigate in three directions:
Attract more such industry from elsewhere.
Arizona got just such a plum in February when Intel announced its plans to build another fabrication plant in Chandler. The 1,000 jobs will be on top of 9,700 that Intel already has in the state.
But, as Rex points out, high-paying manufacturing plants are at the top of every state’s wish list. The competition for them is fierce. And even big operations that will employ 1,000 are still just a tiny fraction of the 60,000 manufacturing jobs the state lost in the last decade.
Diversify into less lucrative industries that, like manufacturing, have favorable cash flows.
The core industries are the best but not the only source of incoming cash. Arizona has long benefited from tourism and the “retiree industry.” Both bring in money that was earned elsewhere.
More recently, Arizona has made headway in providing certain services – for instance, call centers and credit card processing – for out-of-state customers. These act in a similar way to manufacturing by causing new money to flow into the state in the form of wages that are paid or subsidized from outside. They are a net gain for the state’s economy.
The only shortcoming is that the wages fall short of those in the core industries. The current average earnings, for instance, in the administrative services category – which includes the burgeoning business of call centers – was $33,400.
In Pollack’s mind, it’s not wise use of precious resources to go after and subsidize jobs where the wages are medium-level or lower.
Foster large, home-grown manufacturing companies.
This is the ideal. Arizona has had some success in this regard, with such high-tech companies as Tucson’s Burr-Brown Corporation coming to mind.
One important trigger of startup companies is the transfer of technology from the universities. In addition, the Science Foundation of Arizona was created in 2006 to invest in what it judges to be the scientific and engineering areas of greatest economic importance to the state. (A deeper review of the transfer of technology from academia to industry will be the subject of an upcoming edition of Thinking Arizona.)
Getting to sufficient scale is a significant hurdle. The big outside firms such as Intel, Honeywell and Raytheon each employ upwards of 10,000 in the state. By comparison, Burr-Brown – whose considerable success is measured by the $7.6 billion it fetched when it was acquired – employed 1,300. And not all of them worked in Arizona.
The Arizona Commerce Authority thinks about this just a little differently, but the basic ideas are the same. It seeks to add new jobs in “base industries” by wooing new employers into the state, helping existing employers expand their businesses, and encouraging start-up companies that seek to commercialize discoveries made at the state’s universities.
Kristen Hallmer, the authority’s director of communications, says the agency is particularly focused on four ”pillars” – aerospace and defense, renewable energy, science and technology, and small business – that it hopes will provide sustainable growth for the state. The biggest obstacle, it believes, is providing enough workers with the increasingly more sophisticated skills that are needed to work in increasingly more sophisticated operations.
Setting An Objective
The authority did not divulge whether it has specific goals or what they might be, thereby leaving open the question of what the state should be seeking to accomplish.
Should it be to staunch any further loss of manufacturing by finding enough new jobs to replace on a one-for-one basis the future reductions that are sure to come? Should it be to maintain the current ratio of core industry jobs as the population grows? (That would take the addition of 30,000 jobs over the next 10 years.) Or even more ambitious, should it be to regain the 60,000 jobs lost in the last decade?
Pollack tempers any heady ideas with the warning that, realistically speaking, one can affect things “only at the margin.” In this day and age, achieving even the least of the goals will be difficult.
The ship he conjures up is not only big, its course is set straight into a stiff wind. This is the hardest of work.
– Richard Gilman
More coverage in words, graphs and tables:
Earnings Contribution of Manufacturing Declines
Per Employee Earnings Peaked in ’06
Snapshot: Psst! Looking for Work? Try These Industries
Insight: North Dakota Heats Up As Arizona Workers Chill
*All figures are based on data provided by the U.S. Bureau of Economic Analysis. The job numbers are higher than sometimes seen because they include all forms of employment, including self-employment. By comparison, the job numbers from the U.S. Bureau of Labor Statistics cover only those employed by what it calls “establishments.”
I have designed, built, and distributed small electronic toy products throughout the world for over 10-years using Arizona labor. I still design products because that is my true passion, but I no longer manufacture or distribute because I simply cannot compete.
The last ten-years has been fun and frustrating. I have designed products only in small, niche markets hoping the product is not a big seller. It’s an interesting business model because my AZ-made product life is defined by China learning of its success. The entire planet becomes saturated with cheep knockoffs when this happens and I’m forced to stop production. I cannot even buy parts for the prices of complete products made by a workforce that assembles counterfeit parts for a dollar a day.
With the speed at which China steals ideas, my products would be dead before they recovered the tooling cost. I now resort to technology and product licensing instead of breathing life into my own products, but that does not create or maintain AZ jobs. I see this as the top-down economic model working very well with US innovation at the top feeding overseas jobs at the bottom. I’m being a bit cynical, and I apologize for that, but I am trying to get people to think about where things are made when they buy them. I understand the allure to inexpensive products, but we all pay a larger hidden price when we buy certain things. This is a complicated problem on a lot of different levels and it is not going to change any time soon. We all, as a society, need to be aware of the consequences of our purchasing habits. The bigger question is will that knowledge make a difference.