A rising tide does not lift all boats

Manufacturing employment in the United States has taken a beating since the Great Recession, with the vast majority of the pain endured by blue-collar workers.

Between 2008 and 2013, total US manufacturing employment fell by 1.7 million, or about 14%. By occupation, production workers accounted for about 1 million, or nearly 60%, of the decline. Other blue-collar occupations, such as maintenance technicians and truck drivers, accounted for another 400,000, or about 24%. White-collar workers, on the other hand, accounted for the remaining 300,000, or just 18% of total manufacturing job losses.

Between 2008 and 2013, average salaries grew at a 1.7% annual rate. Blue-collar salaries, however, grew by only 1.5%, while white-collar salaries grew by 2.1%. About 70% of white-collar jobs were in science, technology, engineering and math (STEM) occupations.

These trends did not apply evenly across manufacturing sectors during this period; employment levels and the share of employment by occupation both varied, as did wage and salary growth rates. Drilling down in a few capital-intensive sectors-energy, automotive, technology, and chemicals-provides insight into employment trends and projections for the next few years that are masked in the data at the aggregate level.

Boom times for oil and gas

The oil and gas extraction industry stands out as a success story in the aftermath of the global recession. The industry enjoyed a healthy employment rebound between May 2008 and April 2013 due in large part to the strong growth within the US unconventional oil and gas sector. Total employment over the five-year period grew at an annual rate of 5.2%, while output increased at a 5.8% annual rate. With the output-per-employee ratio holding relatively steady, there were no material productivity gains during the period.

Still, this was an era of innovation in the unconventionals sector, requiring significant investment in new technology and physical capital, which in turn required a different type of worker than the conventional oil and gas sector. US capital spending for mining and petroleum infrastructure grew 67% between 2009-the nadir of the investment cycle-and 2013. STEM professions accounted for the vast majority of employment growth during this period, while the ranks of production workers declined (see chart below).

By 2013, there were 53,000 STEM professionals employed in the sector, 30,000 of whom were engineers. This included 18,000 petroleum engineers, whose ranks more than doubled from 8,000 in 2008. The second-largest STEM employment gains were among geoscientists, whose ranks swelled from 5,800 in 2008 to 9,000 in 2013. STEM employment growth over the five-year period totaled 51.2%, and STEM employment's share of total workers increased by about 4 percentage points to 27.6%. Countering this growth, the ranks of production workers fell from 9.4% of the total in 2008 to 6.5% in 2013, which translates to a contraction in relative size of the production worker labor force of nearly one-third-in just five years!

In assessing labor costs as companies plan for future growth, it is important to consider the impact on cost of labor from the strong demand for energy STEM professionals and the shifting mix of labor demand. For example, if the mix of labor had remained unchanged between 2008 and 2013, the industry's overall average labor cost would have increased by 5% per year. In reality, though, the mix did change, away from lower-paid production jobs to higher-paid STEM jobs, which boosted labor cost to 6% per year, a full percentage point higher than if the mix had remained the same (see chart below).

Auto's blue-collar renaissance

In sharp contrast to the employment gains in the oil and gas sector, employment in motor vehicle manufacturing fell 15.1% between May 2008 and April 2013, a decline averaging 2.6% per year. The number of production workers fell by 7%, from 141,000 in 2008 to 131,000 in 2013. Still, production workers' share of total employment rose from 67.0% to 73.9% because the share of white-collar jobs fell by a massive 30% over the same period, from 17.4% to 12.2% of total industry employment.

Looking more closely at the decimation of the back office reveals significant variability. The number of finance employees fell 51.3%; engineers were down 43.8% (mostly industrial and mechanical); and computer and math occupations contracted by 35.4%. However, the number of management employees fell by only 7%, making it one of the better-performing occupations in the sector. A management employee is defined as any white-collar employee not involved in a STEM profession. This includes specialties such as strategy, supply chain, legal, finance and accounting, sales and marketing, and general office support staff (see charts below).

Unlike in the oil and gas industry, the value-add contribution of auto production workers on the factory floor increased substantially. Over the five-year period, output grew at a 4.7% annual rate, while average wages fell by 7.9%, making the industry's productivity gains one of the US economy's success stories for this period.

A major part of the story behind the numbers for US manufacturing of motor vehicles is the transformation of the industry's supply chain from region-centric to truly global. The data show that the manufacturing process now involves greater intensity and simplification of the assembly processes. That is, more automation and fewer models. It also requires parts, sub-assemblies, and vehicles to be shipped around the world at a higher velocity from a global network of suppliers and manufacturers.

US employment trends are tricky to analyze since the sector includes the operations of US-based and non-US-based manufacturers. Global auto companies have the option to manufacture within and import motor vehicles to the United States. Related-party imports in the motor vehicle manufacturing sector-where at least a common, partial ownership exists between the two sides of the transaction, such as a Toyota Prius built in Japan that is shipped and sold in the United States-increased by $40 billion in five years, from $135 billion in 2008 to $175 billion in 2013. Japan, Canada, Germany, Mexico and South Korea are the top five related-party import sources ranked in order of trade value. Imports from non-related parties are minimal.

At the same time, related-party imports of motor vehicle parts increased by $16 billion, from $36 billion in 2008 to $52 billion in 2013. For example, an engine was built by Honda in Japan and then shipped to the United States for assembly at Honda's plant in Ohio. Non-related-party trade (pure arms-length transactions) increased by $14 billion, from $29 billion to $43 billion. The top five related- and non-related-party import sources ranked in order of trade value are Mexico, Canada, Japan, China and South Korea.

There are two takeaways from this trade data. First, the top five countries and their rank order have a lower labor-cost skew for parts than for overall motor vehicle manufacturing by dint of the parts' top-five list being headed by Mexico, rather than Japan and including China. Second, the share of trade in parts is increasing faster than US output of motor vehicles and imports.

These trends explain the recent employment patterns in motor vehicle manufacturing. That is, managing the supply chain is becoming one of the most critical functions for gaining incremental profits in the motor vehicle sector. It requires highly skilled supply chain and finance professionals who can identify and continuously refine the build-vs.-buy parts-and-assembly mix on a global basis. US-based engineers and other STEM occupations do not play a role in this emerging global supply chain profit center.

Variations on the themes

Other capital-intensive sectors such as chemicals and technology had their own unique labor market stories, which are variations on the themes captured in the oil and gas and motor vehicle markets described above.

The US chemicals labor cuts followed the automotive manufacturing storyline but not quite as dramatically. Total employment fell by 7.4% between 2008 and 2013-from 855,000 to 792,000-but the number of production workers fell by only 2.8%. A large drop in employment occurred in the life, physical, and social science occupations, down 20.5% between 2008 and 2013. Medical scientists and chemical technicians led the way, each down by more than 6,000 workers (see chart below).

There were a few exceptions to the cuts. Engineering staff-mostly industrial engineers, but also chemical and biomedical engineers-increased by 6,700. The financial and business professions saw similar gains, with their ranks rising by 6,500 over the same period. Human resources specialists and logisticians saw the highest gains in this category.

Average salaries for the chemicals industry rose at a 1.8% annual rate, with most major occupations not varying substantially from this overall average, including STEM occupations. However, the overall employment contraction for the chemicals sector (-1.6% per year) during the five-year period exactly matched the rate of industrial output contraction, so overall labor productivity remained unchanged over the five-year period (see chart below).

Unlike chemicals but similar to automotive, the US technology sector-defined here as computer and electronic product manufacturing-had a positive productivity story. Total employment fell by 190,000, a 15.1% drop, between 2008 and 2013, with the number of production workers declining by 84,000, a 21.6% drop. Categories that fell the least included finance (down 1.9%), mathematical and computer (down 4.8%), and management (down 6.2%). At the same time, the sector's output grew by a stunning 28.8% over the period, which translates into one of the highest labor productivity improvement rates for the post-Great Recession period (see charts below).

Looking ahead

Understanding the nuances of labor markets within specific categories of occupations and industry sectors offers a sound basis for projecting labor rates and productivity trends in the future. Combined with a robust macroeconomic forecast, they reveal insights that can lead to competitive advantage.

IHS is projecting overall US manufacturing employment growth to average 0.3% for the period from May 2013 to April 2018, which is essentially flat. However, the outlook for average salary gains is slightly better. Whereas average salaries grew 2% for all manufacturing sectors between 2008 and 2013, IHS forecasts the rate to increase to 3% over the next five years as labor markets tighten and economy-wide compensation growth rates rise.

IHS expects these macro trends will be reflected in capital-intensive manufacturing sectors as follows:

• Total employment will remain flat or grow at less than the rate of output growth.
• Productivity gains will remain strong in the automotive and technology sectors and accelerate within the currently weaker sectors, including oil and gas, and chemicals.
• Growth in average salaries will accelerate through 2018 as the general economy improves and overall compensation rates grow. Average annual salary increases range from around 2% for automotive manufacturing to nearly 5% for oil and gas extraction. One factor that is driving up oil and gas extraction salaries, particularly in the STEM areas, is a geographic concentration of demand creating spot labor shortages. For example, Texas accounted for 59% of all petroleum engineers in 2013.
• Occupational employment and salary shifts between white collar (STEM occupations, for instance) and blue collar (production and maintenance occupations) within an industry will be a key forecast driver of total labor costs rather than just changes in headcount.
• Salary growth for key employees in selected manufacturing STEM occupations is more closely tied to overall compensation growth in the industry than any skills shortage-related labor supply tightness. While STEM skills may be in short supply, the salary reaction to this shortage has been muted. In fact, having STEM expertise is not a guarantee of employment within the manufacturing sector. Indeed, overall STEM employment in manufacturing has declined 4.7% since 2008. In fact, it may be the case that the supply-driven salary adjustments occurred years ago within many STEM professions.

For major capital-intensive industries-in the United States as well as globally-the central question is: to what extent will the transformations that occurred in the post-Great Recession era persist into the future? For the oil and gas industry, for instance, IHS expects employment growth to continue but at a slower pace as incremental investment in the unconventionals sector slows.

This potential for slower employment growth will be magnified if today's current low crude oil prices persist for an extended period. Improving productivity, and hence profit margins, will increasingly dominate labor hiring strategies, reducing the relative demand for high-paid management and support personnel. Whereas total employment in the oil and gas sector grew at an annual rate of 5.6% between 2008 and 2013, IHS expects this rate to slow to 3.6% between 2013 and 2018.

While there is much talk about the need for STEM jobs, the share of STEM employment in US manufacturing has seen little change over the past five years, and the absolute number is down by 5%. While there's no denial that STEM skills are important, it is quite possible that the tools used by STEM-dependent industries have evolved to improve the productivity of typical STEM employees. Thus, fewer STEM employees may be required in the future.

While IHS sees very little meaningful US manufacturing employment growth in the next few years, this flat-line outlook masks many trends-some quite dramatic-that exist within specific sectors and occupations. Globalizing supply chains, product and process re-engineering, and technological innovation are constant influences in the transformation of all industries. Any one of these influences could tip the balance for labor demand within a sector and perhaps result in a resurgence in demand for STEM workers.

Doug Handler Chief Economist, North America, IHS Economics
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