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A Stubborn Downturn in Factory Jobs

by Steve Wilhelm
Puget Sound Business Journal, August 25, 2003

The bad news is that manufacturing in Washington has been slumping with the poor economy. The really bad news is that a significant portion of those lost jobs may never come back, according to a new analysis from the state Department of Employment Security.

The study marks the first time state economists have tried to pin down the difference between Washington's "cyclical" job losses -- those that will bounce back when the economy improves -- and "structural" job losses -- those that are essentially irreversible and caused by core changes in business conditions and the competitive climate.

Overall, the state in the last year has lost 20 percent of its manufacturing jobs, dropping to 276,600, according to state figures. From 1990 to the end of last year, manufacturing jobs were down 33 percent last year compared to 1990 -- and three quarters of that drop was caused by irreversible structural factors, the study concludes.

"If a high percent of this change is structural, we would expect employment to recover less strongly at the end of the recession," said Employment Security Chief Economist Kirsta Glenn, who presented the new analysis to the House Commerce and Labor Committee in Olympia last week.

The most severe employment drop was in "transportation equipment manufacturing," down 45 percent between 1990 and 2002 to 75,400 jobs -- mostly due to cuts at The Boeing Co.

The study found 70 percent of that decline is structural, meaning two-thirds of the lost jobs won't come back.

The department also predicts that in two of the state's other most important manufacturing sectors, wood products and food processing, less than one-quarter of the jobs lost will come back following an economic recovery.

Wood products jobs have dropped by 40 percent since 1990 to 17,500, while food processing jobs are down 23 percent to 36,800.

Economist Glenn said some Washington industries have lost the comparative advantage they once had.

For instance, more than two-thirds of the 60 percent drop in primary metal manufacturing jobs, mostly aluminum smelting, is due to structural factors such as the Pacific Northwest losing its historic advantage in electricity costs.

For House Commerce and Labor Committee Chair Rep. Steve Conway, D-Tacoma, the irreversible fading of several manufacturing sectors in Washington is a worrisome trend that needs coordinated attention.

"I believe we have a crisis on our hands, and we need to look to address it," Conway said. "We need the best minds in the state to figure out how we can solve it."

He added that he hopes the next legislative session will be ready to consider ways to encourage manufacturing here, now that it has placed its cards on the table with a $3 billion tax incentive package to keep Boeing Commercial Airplanes here. But he worries that many legislators may want to wait to see if the Boeing tax cuts keep the 7E7 plant here before they ante up more benefits for business.

"I would like to see if we can bring all this together and work in a collaborative way with the Legislature, truly address this manufacturing decline in the state, and do what we need to turn it around," Conway said.

Experts say that some heavy manufacturing in Washington may survive by becoming more regional in nature, with companies such as shipyards continuing to find work among the local maritime industry. But the state may be permanently losing advantages it once had in less-specialized manufacturing such as foundry work, where competition from China has severely damaged companies here.

"The aluminum sector is a dismal story, manufacturing associated with airplanes is a dismal story, but there's also positives," said Joe Phillips, dean of the Albers School of Business and Economics at Seattle University.

For instance, the state may continue as a manufacturing center for technology-based medical equipment because labor to assemble the equipment is a relatively small portion of its value, while the value of the equipment's intellectual component is high. Also, proximity to markets and service can be a critical factor for customers of those types of equipment.

"We're good at knowledge-based industries, where high value-added is know-how," Hill said. "Looking at computer software and biotechnology, there are obviously areas where U.S. in general, and Washington state in particular, have big potential."

Structural factors are a smaller 24 percent of the job losses suffered by the state's computer and electronic product manufacturing sector. That figure suggests that even though computer and electronic manufacturing jobs have dropped by 29 percent since 1990, there's a higher probability many of those jobs will return as the economy does.

Charles Hill, a professor of business administration at the University of Washington, said international factors including reduced barriers to global trade, lower wage rates outside the United States, and the increasing education levels among the elite in developing nations, are contributing to the drop in the state's comparative advantage.

"My guess is, if you tried to break this down you would find that in a lot of industries where there's a high labor content, stuff has moved out," he said.

But Conway warned that while knowledge-based and technology jobs are important for Washington, they may not meet the needs of many people who are more oriented to working with their hands or to building things.

"I believe that manufacturing jobs are so critical to family-wage job base in our state, and have often been the best-paying jobs in the state," he said. "I'm very concerned when I look at these statistics and see these kinds of declines. It potentially could mean a permanent stagnation in terms of incomes in the state."

Steve Wilhelm, Staff Writer
A Stubborn Downturn in Factory Jobs
Puget Sound Business Journal, August 25, 2003

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