WHY MANUFACTURING IS DIFFERENT
Let's start with innovation, which is the force that powers long-term improvements in our standard of living. Here, manufacturing strongly outperforms the rest of the U.S. economy. Manufacturers are responsible for more than two thirds of all company-performed domestic research and development spending, even though they only generate about 11 percent of America's GDP. More than a third of all U.S. engineers work in manufacturing. And about 22 percent of all manufacturers introduced a new product or service between 2006 and 2008, compared to 8 percent of non-manufacturing firms.
Why is manufacturing more innovative compared to other businesses? The sector has long benefited from the relentless application of technical knowledge and skill. Every year, production workers, engineers, and managers find better ways to solve the technical problems of production. As a result, production becomes more efficient and, from time to time, the production process gets reorganized.
That recipe for innovation doesn't work as well in the rest of the economy. In the service sector, only a few production processes, such as filling orders for fast-food meals or scheduling hospital patients, rely heavily on solving technical problems, often through the use of better information technology. But when it comes to most services, the "product" isn't as clearly predefined as in manufacturing, so it's hard to make it more efficiently. What counts as good service -- be it a clean hotel room or a healthy patient -- is often a matter of opinion, and the process of production is frequently inseparable from the service itself. Take the restaurant business. It's pretty hard to make waiters serve meals faster.
Because so much less is known about how to innovate in the services sector, an economy that loses its manufacturing base ends up sacrificing much of its ability to innovate at all. The consequence is slower growth in living standards.
Manufacturing also pays more than other industries. A forthcoming Brookings report by Susan Helper and myself shows that even after taking into account the characteristics of workers and jobs that influence wages (such as education, occupation, union status, geographic location, and demographics), manufacturing workers earn about 8 percent more per week than employees in other industries. Lower-wage workers especially benefit, earning about 11 percent more than their peers in other businesses, while high-wage workers earn just 4 percent more.
Although manufacturing's wage advantage may have shrunk after decades of offshoring and union decline, there are reasons why it still exists and will likely continue. Because manufacturing is more capital-intensive than the rest of the economy, downtime is more costly than in other industries. Manufacturers pay a premium to attract and retain workers who are skilled and motivated to keep the machines running. Factories are also typically larger than other business establishments, so it is more difficult for managers to control the production process in manufacturing. That means production workers have to take greater responsibility than in other industries, and manufacturers pay more to find the employees who can handle it.