Drop in Manufacturing Jobs Doesn't Mean Labor Markets Aren't Tight

The numbers tell the tale. Industrial output remains strong, but the amount of workers chasing those once-cherished jobs has fallen off.
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Rosie, your husband doesn't need the

riveter anymore, either.

Following the end of World War II (the victors we remember today), the domestic army of women workers who built the tanks in Detroit, ran the steel mills in Pittsburgh and filled cans of rations at food companies across the country were less than thrilled about giving up what, for many, were the best-paying, most-interesting jobs ever afforded to them.

However, when the veterans sailed home, they returned to a country starved for manufactured goods as never before. There was demand, and there were jobs aplenty. By 1969, the manufacturing sector accounted for 28.5% of the nation's jobs -- as of October 1999, that number had fallen to 14.2%, or 18.3 million jobs.

With less -- fewer bodies, that is -- it appears as if a lot is still getting done.

Various surveys and anecdotal evidence show lots of improvement in manufacturing production, new orders and exports in 1999 -- but it hasn't translated to the job market. Manufacturing jobs declined by 15,000 in October, and the industry has lost 236,000 jobs this year.

Economists say the lingering effects of the worldwide economic crises are partially to blame, but there are larger issues. Manufacturing is steadily declining as a percentage of the labor force in this country. But smaller manufacturing firms are also competing with a service sector paying increasingly competitive wages and benefits, hurting their ability to hire more workers.

"There's a strange dichotomy of labor shortages in an industry that's already downsizing," said Diane Swonk, deputy chief economist at

Bank One

.

Less Jobs and Less Workers

The manufacturing industry took a hit last year for a number of reasons. For one, the Russian default and global crisis cut off demand for manufactured goods from one of the most populous countries in the world. For another, other nations were forced to sell their goods more cheaply to try and recover from their respective recessions, and that cut into domestic manufacturers' ability to raise prices or produce a higher volume of goods.

Manufacturing lost jobs every month from March 1998 to July 1999, not counting August 1998, when striking

General Motors

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workers returned to the assembly lines.

Brian Jones, economist at

Salomon Smith Barney

, suggests that one lingering effect from the global economic crisis is that some firms are simply being cautious in adding more workers.

Since July, the U.S. manufacturing sector continued to shed jobs, albeit at a slower pace than during the first half of the year. It's a trend that's expected to continue, as this economy moves further away from depending on manufacturing industries and those jobs flock overseas.

"There's a longer-term trend downward that's in place and has been for years," says Mike Niemira, economist at

Bank of Tokyo-Mitsubishi

. "That's the backdrop to begin with. In good times, in terms of employment, manufacturing

jobs per month might be flat to 5,000, because of the longer-term trend that's in place."

Because the labor force is changing, the manufacturing situation is a bit less dire than the official statistics.

According to the

Labor Department's

household survey (individuals rather than companies), the manufacturing unemployment rate is lower than the overall rate. The current manufacturing unemployment rate is 3.7%, compared with a 4.1% overall rate. Now, some of this is statistical semantics (if you're temping at a steel mill, you can say you're a manufacturing worker -- but payroll statistics would show you're employed by a temp agency, and you'd fall under the service sector).

Nope. What economists are saying, beyond the fact that manufacturing jobs are going overseas, is that more manufacturing workers are retiring right now, and they're not being replaced. Retirees are considered to be out of the labor force, which lowers the jobless rate.

"We've got record numbers retiring in the manufacturing sector and many employers are complaining that they can't fill positions," Swonk says. "This is an industry that didn't hire in the 1980s, and it's also an industry where people retire much younger."

Competing for Workers

The true issue, economists say, is that smaller manufacturers that offer lower wages are having a harder time competing with service industries offering more competitive wages and better benefits in a less stressful, less dangerous environment.

"Firms continue to use cash bonuses to attract and retain workers," says the St. Louis Fed in the

Federal Reserve's

most recent

Beige Book, an anecdotal account of nationwide economic conditions. "Concerns about finding a sufficient number of qualified workers have delayed some firms' expansion plans."

The gap between the average hourly earnings for manufacturing jobs (excluding overtime) and for the service industry is wide -- $14.08 per hour for manufacturing vs. $12.87 for the service sector. But the $1.21 difference has narrowed significantly since 1994, when manufacturing paid $12.18 per hour on average and the service industry paid $10.69.

"The smaller ones are competing

with McDonald's for workers," Swonk says. "Do you want to do that, or do you want to be working in a manufacturing plant where you can get hurt?"

Even as the manufacturing industry continues to shrink, the overall labor markets just get tighter. Workers continue to retire, but aren't being replaced, even as a record number of people are able to find jobs in this economy.

"The unemployment rate continues to grind lower," Jones said. "If we are truly running out of people, that's where it's going to show up."