TIME FOR A NEW LOOK AT MANUFACTURING AND HIGH-TECH

The Providence Business News, May, 1997

How far has Rhode Island's manufacturing employment base fallen? What must we do to maintain a stable employment base in manufacturing? Other than the silly topic of whether manufacturing here is dead or alive, these are the two questions that are discussed most frequently. Everyone seems willing to venture answers to these questions. I find it intriguing that even the most influential persons in this state, those who directly influence policy, continue to approach these with a "traditional" perspective that lost its relevance ten years ago when Rhode Island became a service and information-based economy. If we are to meaningfully assess the performance of Rhode Island's manufacturing sector, we must begin to address questions such as these with a "non-traditional" perspective.

As a first step in this process, it is necessary to question the viability of the existing employment classifications upon which our assessments of manufacturing employment are based. The Standard Industrial Classification (SIC) code categorizes employment by a series of two, three and four-digit breakdowns. As anyone familiar with SIC codes will attest, the amount of detail allowed for the manufacturing sector is noticeably greater than for the service sector. This shouldn't come as much of a surprise since these classifications were formulated during our nation's manufacturing era, as the "Industrial" in SIC name code attests. But, while these classifications may have served us well during the manufacturing era, today they are showing signs of age.

Should we limit our classification of manufacturing activity exclusively to "goods"? If we do, then the existing "wisdom" on the performance of our manufacturing sector is valid. Let me argue that we must be more realistic and extend the definition of manufacturing activity to include both goods and services.

Manufacturers produce both final goods for consumers and inputs for other firms. Just as this classification is not restricted to "final goods," we need to extend the definition of "manufactured inputs" to include both goods and services. Today, manufacturing firms that utilize computer inputs tend to rely far more on personal computers than on mainframes. So, to produce its product, a hypothetical firm might use processed steel as an input, which is classified as "manufactured" along with data processing and computer programming services which are listed under the SIC category "Business Services." Can we manufacture services? I believe we can. Business services should be viewed as a valid form of production. The importance of this should be obvious: an increasing part of the wealth generated during the "information age" is related to the creation and processing of data.

If we broaden the definition of manufacturing to include the production of both goods and services, then, the trend in Rhode Island manufacturing employment is very different from what is commonly believed. For well over a decade, the number of jobs in manufacturing has been falling while business service employment has been rising. The result, as the graph shows, is that "Manufacturing Goods and Services" employment has remained constant throughout this entire recovery.

This brings me to the second question I posed, concerning the requirements for maintaining a stable manufacturing employment base. Ironically, some manufacturing employees, those employed by "temp" agencies, are classified under business services. As a result, we don't know the actual number of manufacturing employees in Rhode Island. We therefore don't know when manufacturing employment peaked, how much manufacturing employment has fallen since that peak, or the manufacturing job change since the present recovery began. What we do know is that in our present low-inflation climate, manufacturing firms must cut costs to remain competitive. This has compelled surviving firms to incorporate labor-saving technology into production, which, as its name implies, has reduced our manufacturing employment base. So, the "good old days" are truly gone: to maintain a stable manufacturing employment base, it is no longer enough to retain the same number of manufacturing firms. We need existing firms to expand and new firms to locate here.

This reclassification of manufacturing activity has important implications for public policy. High tech services and manufacturing must no longer be viewed as distinct or mutually exclusive. Policy recommendations should encourage both areas simultaneously. Just as roads and bridges provide "external economies" for businesses, which has historically provided a justification for public investment in this area, knowledge and technology also generate external economies. We should no longer make separate sets of policy recommendations for manufacturing and "high tech." Instead, this pair should be viewed as our primary "cluster."

by Leonard Lardaro