Civic Analytics

Headlines on the state of U.S. manufacturing are picking up again, which can only mean one thing: We must be approaching an election.

Automation. Trade agreements. China. Trump. Each provides a crucial storyline for the narrative in 2020. Well, maybe not that last one given the thorough debunking by Caroline Freund, Jonathan Rothwell, and others of the suggested link between manufacturing and the 2016 election results. But why let truth get in the way of a good story, as Twain put it. And, really, who wouldn’t want to hear from Twain about the state of affairs today.

Automation, trade policy, and foreign competition are all important aspects of the story, but there are others not getting their due. Of course, some lack of nuance in reporting should be forgiven. It can be difficult to get past the magnitude of top-line statistics that show the loss of about 2.5 million manufacturing jobs since 2002, according to data from Emsi, an Idaho-based labor market analytics firm. Details can get buried under the weight of that lede.

But look beneath those top-line statistics and an interesting story starts to emerge. One that Lawrence Mishel, Susan Houseman, and even people at the Congressional Research Service have tried to call attention to recently without much luck, at least not in the form of stories in the mainstream media. And that’s a shame because while it might not rise to the level of political fodder, this underappreciated aspect of the story could have far more important implications for labor market policy and the future of work in communities relying on manufacturing for a significant portion of local employment.

That missing piece of the story is the shift in payroll jobs from manufacturing companies to staffing firms. Yes, outsourcing has been a prominent feature of the narrative since at least the 1970s; it’s not a new storyline. But consider what’s happened during our record-setting period of economic growth since the last recession. The number of production workers on payrolls of manufacturing companies grew by less than 1% per year during 2009-2018. By contrast, the number of production workers employed by staffing or temporary help firms (NAICS 5613) increased by 72%. Put another way, we’re approaching the point where 1 out of every 12 production workers in the U.S. is now employed by a staffing firm, an increase of nearly 60% since 2009, according to my analysis of Emsi data.

That still pales in comparison to the 6.5 million production jobs at manufacturing firms, but outsourced labor is gaining ground. Manufacturing companies account for about 70% of all production jobs in the U.S. economy, but only an estimated 51% of net new production jobs created during 2009-2018. Staffing firms added 43% of those new jobs.

Mishel’s analysis does an excellent job of explaining another important aspect of this story: the wage gap. The median wage for production workers employed by manufacturing firms is about 35% higher than the median wage for production workers at staffing firms, which is just $26,690 annually, according to the Bureau of Labor Statistics (2018). Even at the 90th-percentile wage for the most skilled or experienced workers, the gap is still more than 30%. Mishel summarizes what a continuation of this trend could mean for how manufacturing is viewed through the lens of economic and workforce development policy:

“Contrary to some claims, there is a sizable manufacturing compensation premium…[but] there has been severe pressure on manufacturing firms to reduce pay and they have done so by reducing wages and by using staffing services firms as intermediaries. The result is that the compensation premium in manufacturing is substantially lower in recent years than it was in the 1980s. This suggests that those who advocate policies to expand manufacturing cannot take the pay premium for granted. Rather, they should create and promote policies to support compensation levels and the overall quality of jobs in manufacturing.”

Mishel is right, of course, but it’s a double-edged sword. On the one hand, the shift of jobs to staffing firms is eroding the wage premium. On the other hand, there is some evidence that suggests staffing firms may be keeping people out of long-term unemployment. During the decade of the 2000s in Michigan, for example, the manufacturing industry averaged about 44,000 employee separations per quarter, according to my analysis of Census data. Sixty-two percent of those separations resulted in persistent non-employment, defined as two or more quarters; 34% of those separated workers transitioned to other jobs. That ratio has since flipped. In 2017, 54% of manufacturing employee separations resulted in workers moving to other jobs and 43% resulted in persistent non-employment.

Lack of detailed industry data makes it difficult to say how many of those separations in Michigan resulted in workers transitioning from jobs at manufacturing companies to jobs at staffing firms, much less how many of those employees were production workers versus other types of occupations. But we do know based on averaging the most recent five years of available data, 2013-2017, that 23% of manufacturing employee separations in Michigan resulted in workers transitioning to jobs at companies classified in the parent industry for staffing and temporary help firms (NAICS 56 Administrative, Support, Waste Management and Remediation Services), up from an average of 18% in the early 2000s.

One thing is clear: We need more smart people in the weeds on this, focused on what this piece of the story means for workers and communities, especially in areas of the country specialized in, and therefore largely dependent on, manufacturing. On the policy front, what can we do to ensure that manufacturers have access to needed workers but at the same time protect temporary labor from further erosion of the wage premium and the uncertainty of contingent work? Can we strengthen the safety net in a way that boosts productivity for firms and positions temporary workers for higher-skill, higher-wage employment opportunities, assuming this trend will continue? What, if anything, are staffing firms doing to work together to address these challenges, particularly if they believe accelerating automation threatens their business model? Is our workforce development system prepared to respond?

Hopefully we won’t need to wait for the post-election explainers in 2021 for answers.