On Friday July 31st, the New York Times reported that the economy shrank less than expected between April, 2009 and June 2009, possibly signaling an end to the recession. They noted that businesses will not immediately begin hiring again however, prospects are looking upwards. While most will take shrinking losses, in this economy, to be a good thing, one wonders what solace it provides for Michigan and the Detroit area.
While programs like “Cash for Clunkers” may provide a temporary spike to Michigan’s auto industry, the future of the program is uncertain. The Detroit News reported that the U.S. House has passed a bill that would grant $2 billion more dollars to the program but some uncertainty remains as to when and if the Senate will pass the bill according to the Detroit Free Press. Despite the prospects of the Cash for Clunkers program, the auto sector appears to still be in a state of decline and jobs are still being shed.
It is pretty easy to see that the auto sector is trending downward and is being replaced, in part, by the service sector.
Figure 1: American FactFinder.
There are four reasons that make this more problematic than first meets the eye. First, while Figure 1 reflects the relative percentage of both sectors to the total for all sectors, as we reported on this blog last week, the unemployment rate is still growing in Michigan. This means that both sectors are declining in terms of their raw numbers. See Figure 2.
Figure 1: American FactFinder.
Second, the difference in wages between the two sectors also makes this finding problematic. In 2007, for Michigan, on average, the average salary in the manufacturing sector was $38,816 higher than the service sector.
Figure 3: American FactFinder
Third, while it is always troubling to lose jobs, we know that the manufacturing sector typically has a higher multiplier than most other sectors. This means that for each job lost in the manufacturing industry, more spinoff jobs are lost than would be in other sectors. Each manufacturing job helps support a larger number of other jobs than do most other sectors. Using IMPLAN, an input-output model, this multiplier can be computed. Relying on 2007 IMPLAN data for Southeast Michigan, the estimated multiplier for the automobile manufacturing sector was 3.76 (Many debate the multiplier of automobile manufacturing jobs. It is dependent on time, geographical region, and a host of other factors). Therefore, for every 100 automobile manufacturing jobs created an additional 276 are generated. Alternatively, for every 100 lost, an additional 276 will be lost as well.
The service sector category is the compilation of many smaller service sectors and automobile manufacturing is likewise only one type of manufacturing. IMPLAN can compute the multiplier for their individual components of the service sector. Using 2007 IMPLAN data for Southeast Michigan, the estimated multiplier on business service jobs is 1.48, legal service is 1.77, and architectural and engineering service is 1.82. While these are simply average estimates for a single time point and in one geographical area, it demonstrates the impact of losing (or gaining) automobile manufacturing jobs (with a multiplier of 3.76) can have on a region.
Finally, one of the essential problems is that these lost automobile manufacturing jobs tend to be high paying jobs (see Figure 3) that did not usually require an advanced degree. Those who have lost these jobs are not well positioned to enter into another sector. We can use education levels to approximate the difficulty less educated people might have in finding work outside the auto industry. The Bureau of Labor Statics reports that while the unemployment rate among those with a bachelors degree or higher is 4.7% nationally, as of June 2009, 9.8% of those with a high school degree and 15.5% of those without a high school degree are unemployed. The Detroit metropolitan region is very comparable to other major regions like New York, Chicago, Pittsburgh and Atlanta, with respect to educational attainment, having 26.1% of the population with a Bachelors degree and 10.1% with a graduate or professional degree. However, the central city, Detroit, fairs far worse than other central cities with 11.3% of the population holding a bachelor’s degree compared to Atlanta at 29.4%, the next lowest of the five cities. Likewise with only 4.2% of the population holding a graduate/professional degree, in Detroit, it is almost a third lower than Atlanta at 11.7%, the next lowest of the five, according to American FactFinder.
So we should not give up on manufacturing in the Detroit area, nor would we want to, because we can use the same skills that have made Detroit competitive. At the same time, we also need to make sure that our citizens are far more educated and ready for the new economy.