Stephanie Scarbrough/Associated Press
This is Part 2 in our series on manufacturing in America. Part 1 asked why Americans aren’t filling the manufacturing jobs that are already here. Subscribe to the Planet Money newsletter for the next installment. As always, our podcast is here.
Politicians in both big political parties have been trying to reengineer the U.S. economy to boost manufacturing. What makes manufacturing so special? Besides, you know, politics.
Some writers and economists say that romanticizing this one particular sector of the economy is more about nostalgia or political pandering than rational thinking about what will best serve workers and the economy.
Putting aside the debate about whether politicians can successfully bring back a large number of manufacturing jobs — many economists are skeptical of this — we at Planet Money were curious, on a deeper level, about what makes manufacturing special enough to warrant all this ruckus in the first place?
So we delved into nerdy econ studies and data, and we reached out to a number of economists, including two Nobel laureates.
We’re going to examine this question from two angles. The first is whether manufacturing is special for workers. That will be the focus of this Planet Money newsletter. The second, which will be the focus of a future newsletter, is whether manufacturing is special for the broader economy.
Manufacturing pays a premium
“Manufacturing is special,” says Gordon Hanson, an economist at Harvard Kennedy School who has conducted influential research on American manufacturing. “That’s because as long as we’ve been able to measure earnings in the sector, it’s just paid workers more, especially workers without a college education.”
Economists refer to this as “the manufacturing premium.” And it’s important to note that some research indicates that the manufacturing premium has declined or even vanished in recent decades.
However, Hanson and other economists we spoke to emphasized that the most compelling evidence on this topic indicates that the manufacturing premium is still significant. In particular, they highlighted a recent, peer-reviewed study from economists David Card, Jesse Rothstein, and Moises Yi. Hanson described it as “the gold standard.” The economists utilize much richer, more comprehensive data than previous studies. And they employ a fascinating technique that enables them to systematically observe what happened to the earnings of over 100 million Americans as they transitioned between industries.
“We essentially track every single workplace in the United States and monitor workers as they move from one workplace to another,” explains Card, an economist at the University of California, Berkeley who recently won the 2021 Nobel Memorial Prize in Economic Sciences. (Read this Planet Money newsletter that explains why he won the Nobel.)
It’s widely known that industries like tech, finance, law, and medicine pay workers handsomely. However, these high-earners typically possess advanced degrees and valuable skills or talents. If they had chosen a different industry, they would likely have earned a decent income there as well. It’s challenging to determine how much of their pay is attributable to their unique abilities and how much is influenced by other factors in their chosen industry, such as its profitability, location, unionization, management, culture, company size, competitiveness, and more.
A similar issue arises when examining manufacturing. The average manufacturing worker earns over $35 per hour, according to the Bureau of Labor Statistics. This is significantly higher than the average earnings of workers in the restaurant industry, which is approximately $21 per hour. What explains this wage disparity? Is it the workers themselves or some industry-specific factors?
Consider an experiment where you can observe, systematically, the impact of moving restaurant workers into manufacturing roles, or vice versa. This is essentially what the economists do in this paper, from a statistical perspective. And it’s not just restaurants and manufacturers; it encompasses virtually every industry.
Using a vast dataset, the economists track the outcomes for millions of workers as they switch industries. This approach allows them to control for age, education, and experience like other studies, but it goes a step further. By following the same workers, they control for qualities that are not easily quantifiable in data, such as their determination, knowledge, work ethic, and resilience.
With this methodology, the economists can dissect the noise surrounding why specific industries compensate workers at specific rates. They can delve deeper into the actual cause of how working in a specific industry can impact people’s incomes — essentially, how unique an industry is.
Card, Rothstein, and Yi utilize restaurants as the baseline industry for comparison with other industries. This is the industry with the lowest average earnings in their data. Think of fast-food and cafeteria workers, cooks, and servers. The baseline could theoretically be any industry, as it’s somewhat arbitrary; they measure all industry premiums against this same baseline.
The industry premiums they discover can be viewed as the wage increase the average person would receive by switching from a job in this primarily low-wage service sector to another industry, without pursuing further education or dramatically altering their existing skills.
The manufacturing premium vs. other industries
The economists calculate that, on average, transitioning from a restaurant job to a manufacturing job results in a 35% pay increase for workers.
This is a substantial premium, higher than transitioning to retail (an 11% premium), education (a 13% premium), agriculture (a 16% premium), healthcare (a 19% premium), transportation and warehousing (a 24% premium), construction (a 25% premium), finance and insurance (a 32% premium), and professional, scientific, and technical services (a 33% premium). Quite special!
However, the manufacturing premium is lower than that of certain other sectors, including “information,” which encompasses the movie, publishing, broadcasting, and telecommunications industries (a 39% premium); utilities (a 49% premium); and mining, quarrying, oil, and gas (a 62% premium). So manufacturing falls into the medium-special category.
That being said, the 35% pay increase in manufacturing is an average across a diverse sector. Manufacturers produce a wide range of goods, including socks, rockets, potato chips, petrochemicals, mannequins, skateboards, electronics, cars, Twinkies, and more.
Card, Rothstein, and Yi break down the manufacturing premium further, examining it in various subsectors.
They discover that at the lower end of the manufacturing spectrum are industries involved in apparel and leather manufacturing (a 15% premium), furniture manufacturing (a 19% premium), and textile mill and wood products manufacturing (a 22% premium). Somewhat less special compared to many other industries.
In the middle are manufacturing subsectors like plastics and rubber manufacturing (a 30% premium) and food products manufacturing (a 32% premium). Now we’re getting somewhere.
At the higher end are industries engaged in computers and electronics manufacturing (a 42% premium), transportation equipment manufacturing (including cars, ships, and planes) (a 43% premium), chemicals manufacturing (a 47% premium), and — the highest of all — petroleum and coal manufacturing (a 62% premium).
Particularly noteworthy is the significant premium in the last category, which, alongside mining, offers one of the highest premiums among all industries considered by the economists. This helps explain why, despite increasing concerns about climate change, these fossil fuel-related jobs remain politically popular in many regions of the United States.
A clear takeaway from this data is that high-end manufacturing provides workers with a substantial pay increase compared to other industries. On the other hand, low-end manufacturing, such as apparel and furniture manufacturing, doesn’t offer as much of a premium.
Why does manufacturing pay a premium?
Card, Rothstein, and Yi don’t provide definitive answers as to why manufacturing pays a premium. Several plausible explanations exist.
One theory suggests that manufacturing has historically been a more unionized sector, resulting
