RHODE ISLAND'S SHIFT FROM MANUFACTURING TO SERVICES CONTINUES

The Providence Business News Special Supplement:
Decade of Excellence, May, 1996

As we move ever closer to the year 2000, the nuances of the "Information Age" will continue to push Rhode Island in directions it has never gone before. These not only diminish our ability to accurately determine how well our economy is performing at any point in time, they greatly complicate the process of planning for the future.

Consider, for example, the task of gauging how well our economy is performing. This is much different in today’s economic climate than the one we faced just a decade ago. Back then, Rhode Island was primarily a manufacturing-based economy. Determining how our state’s economy was performing was relatively simple. All one had to do was to examine the cyclical behavior of manufacturing employment and a fairly accurate assessment resulted. There was also a fairly consistent set of "rules." In a recession, blue-collar job loss occurred. The affected workers could rest assured, however, that once the recession ended, they would return to their original jobs. When the recovery began, job loss was relatively small and relegated largely to blue collar employees. And, of course, a "job" typically meant a full-time job with fringe benefits.

Everything changed for Rhode Island in late 1987, as a major structural event occurred: our economy moved from being primarily manufacturing-based to a service and information-based economy (see graph). This "structural change" initiated a series of adjustments (other than our 1991 banking crisis) that we continue to experience today. First, our largest employment gains occur in the service sector. In fact, the number of jobs lost in manufacturing have been more than offset by service-sector employment gains. But, this brings me to the second point: the meaning of a "job" is no longer what it was before. Often, newly-created jobs are part-time in nature with no fringe benefits. Third, job loss occurs along with job creation during recoveries. Job loss today results not only from defense cutbacks, but from corporate downsizing and labor-saving technological improvements incorporated into production. Often this entails the permanent elimination of positions. So, an improving economy no longer guarantees that unemployed persons will become re-employed in the near future. And, the employment changes reported every month no longer represent job creation as they once did. Instead, they indicate the difference between the number of jobs created and the number lost. Fourth, much of the job loss during this recovery has been for white collar employees. Corporate downsizing and "horizontal management" methods are inherently labor-saving in nature. In fact, I view the shift in management technique from vertical to horizontal management as a technological improvement in management - yet another example of labor saving technology. Finally, skill mismatches occur even when there is a relatively large pool of unemployed persons. In the "good old days," a person could receive much of the human capital he or she needed upon graduation from formal schooling or training. Today, and into the foreseeable future, upskilling and retraining will be "constants" in the workplace. Persons with skills who lose their jobs through downsizing or for other reasons will not necessarily possess the same skills currently demanded by the firms expanding their operations in our state. Skills, per se, no longer matter. It is the currently-demanded skills that are relevant to persons in our workforce.

Where does all of this leave us? Rhode Island is not alone in experiencing these negatives as it continues its transition from manufacturing to services. For better or worse, Rhode Island, like every other state, must find its niche in this differently-structured economy. From now on, cyclical and structural change will go hand in hand. Gauging our economy’s performance will thus be very different as it is much less predictable today than it was in the manufacturing era. It is now necessary to follow a large range of indicators to understand the flows of economic activity in today’s economy. Also, surviving manufacturing firms will be forced to continually make labor-saving technological improvements to remain competitive. Thus one of the "new rules" is that the survival of manufacturing here will require ongoing layoffs in that sector. Finally, Rhode Island can no longer rest on its laurels as a "northeast state" to presume that its labor force possesses adequate skills. The constantly-evolving skill requirements in our future will require updating and upgrading the human capital infrastructure of our labor force just as much, if not more, than we must maintain and increase our physical capital infrastructure. Small firms and entrepreneurship will largely define Rhode Island’s future success

The dizzying number of changes we have experienced over the last decade has, understandably, created a great deal of anxiety for Rhode Islanders, adding to their historical pessimism about conditions here. As we move into the next decade (and millennium), however, there is a basis for optimism. The good news is that defense cutbacks have almost run their course here and the major effects of the 1991 banking crisis are now behind us. Our recently rebenchmarked employment data contained a pleasant surprise as well: there appears to be a significant amount of business formation and employment expansion by small firms in our state. And, if my most recent New England Economic Project forecast proves to be correct, the decline in Rhode Island manufacturing employment that began over a decade ago will end in 1998.

The most serious problem facing Rhode Islanders is our "dual deficit:" the deficits in our state budget and the continuing deficit our citizens have in confidence about their state. As for our fiscal deficit, state government must realize that the true problem is a "structural deficit:" we would have annual deficits even if we were at full employment. We are thus spending too much, given our overall level of economic activity. Spending cuts are called for, but these must be focused on "consumption-oriented" types of expenditure, sparing "investment-oriented" spending. This will require systematic, long-term planning by our state’s government, a practice that has been all too rare in the past. But, making such systematic and well-conceived planning "routine" will not only eliminate our structural deficit, it should go a long way towards curing our confidence deficit as well.

by Leonard Lardaro