Saturday, September 12, 2009

Mark J. Perry on the Service Economy


I recently had an email exchange with Mark J. Perry — a professor of economics and finance at UM-Flint and author of the Carpe Diem blog — about Flint's economic situation. Prof. Perry writes:
What [the graph above] shows is that Flint has gradually become a service-based economy, and now has more service jobs and fewer manufacturing jobs, as a percent of total jobs, than the U.S. as a whole. So as much as we and the country think of Flint as a manufacturing-based economy, it’s no longer true, and hasn’t been true for a long time.

Consider that in 1990 about 1 in 3 jobs in Flint (Genesee County) was in manufacturing, and today it’s only 1 out of 11 jobs in manufacturing. So the Flint area is now more of a service-providing economy than the rest of the country. Which is good I think in general, because a) we aren’t so dependent on one industry and one employer (GM), and b) have a more stable, diversified economy.

Perhaps Flint is ahead of the rest of the state, or SE Michigan, in making the transition from manufacturing to service. Because the majority of the manufacturing job losses here took place in the past, Flint is well on its way to re-inventing itself as a service-based economy. Employment growth in the health care and education sectors have replaced some of the loss of manufacturing jobs.

Here's an interesting fact: Ann Arbor now has more manufacturing jobs as a percent of total jobs (6.5%) than Flint based on July data! In fact, Flint has a lower percentage of manufacturing jobs than any of the 12 metro areas in the state of Michigan.

Of course, this analysis is of the percent of total jobs in various sectors, and doesn’t directly account for the overall loss of total jobs. But the job composition issue is important.

I had this recent post on the decline in U.S. manufacturing employment; it’s now at the same level as 1941, and below 9% of totals for the first time ever.

One way to think about this decline is to compare it to the same decline in the farming sector of the U.S. economy, going from probably 50-60% of all jobs in the 1800s to 3% today. Most would agree we are better off to have “lost” all of those farming jobs. Likewise, we are probably better off losing jobs in manufacturing. After all, keep in mind that service includes accounting, legal, healthcare, education, consulting, advertising, banking, brokerage, insurance, engineering, architects, computer programming, web design, etc., most of which are highly paid professions.

Also, a decline in employment is not the same as a decline in output. We produce more food today with 3% of the population working on farms than we did 100 years ago when 50% of the workforce were working on farms. Likewise, we produce more manufacturing output today with fewer workers than we did 20-30 or 50 years ago. Reason: Increased productivity, just like for agriculture.


7 comments:

  1. I think I always sort of had that idea that Flint was becoming service based, mostly because the only big industry/companies that I could see left in Flint were hospitals. In a way, isn't that the direction this country is going as well?

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  2. Every local or regional economy, including metro Flint's, can be analyzed in terms of its import-export balance. I'm talking about imports and exports across the boundary of the local or regional economy.

    Every such economy has businesses that operate on the import side...they obtain or distribute goods or services from outside the local/regional boundary, and send out money to pay for them. That includes most retailers. Some locally based services also facilitate the sale of import goods, and therefore are counted on the import side.

    Every economy also has some participants who sell locally produced goods and services. Around here, that includes local farm retailers and car dealers that sell Chevy pickups. Doctors and dentists have to be counted on the import side, since most of the supplies and tests they use come from someplace else.

    Most importantly, every economy must have exporters. That includes manufacturers who make things that people elsewhere want to buy. It also includes a few locally created services that are distantly consumable. The money that is paid for those goods and services makes its way here.

    That revenue from exports, plus governmental transfers and other secondary funding sources such as workers who commute elsewhere to work and bring home their income, is all of the money that's available to pay for imports. The more we export, the higher a standard of living we can have, measured in terms of what imports we can afford to buy.

    It's misleading to say that it's good to move to a services-heavy local economy. Relatively few such services are distantly consumable. Even if some of those services are locally created and consumed, the rest will be import-facilitators because the supplies they use are imported. Thus a services-based economy inherently is a heavy importer. If we have declining exports, how in the long run do we pay for all those imports...purely by governmental transfer payments and commuting workers?

    Manufacturing diversification of course is good, but one way or another it's essential that we find ways to boost our export activity. Otherwise in the long run our local/regional balance of payments inexorably will dictate a declining standard of living.

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  3. This is a joke, right? Flint has transferred from a manufacturing economy to a service economy alright...30 percent unemployment and one of the direst economic situations in the nation. To somehow imply that the city is ahead of some economic curve is frightening but accurate. I think the rest of the country is headed for Flint-style problems. In fact, much of the country is already there. I'm glad a right-wing economist who probably has tenure and is paid by Michigan taxpayers can find a silver lining in all this.

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  4. I don't have access to the requisite data, but Prof. Perry probably does...what percentage of metro-Flint service-sector jobs, including retailing and distribution, are export-revenue contributors rather than import related?

    The export-revenue category would include Prof. Perry's turf, higher education, but only in regard to those students who come from outside the metro area. I work in non-automotive manufacturing, so I'd be on that side of the ledger as well.

    The analysis that initiated this thread would be most interesting if repeated with national and local job-historical data categorized by export or import.

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  5. A couple of additional questions:

    Roughly what percentage of City of Flint household income is from governmental transfers?

    The State of Michigan is in long-term financial trouble, and Obama Adminstration economists are talking about unemployment not significantly recovering for an extended period. What happens to the City of Flint economy if funding for governmental transfer payments is cut back significantly?

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  6. It is my opinion that the term "Service Based Economy" is often meaningless, because it tends to ignore the fact that service-based professions require much more than other service providers to exist. I believe that my old home town Flint can illustrate that there is such a thing as a "sweet spot" ratio of service-based employment to manufacturing employment. I challenge Professor Perry to analyze his data of Flint's past to identify the sweet spot where the ratio was just right to supply prosperity for both types of economies. Flint still had it when I left there in the early 1960's. I believe Flint and other areas need their respective "sweet spots" for survival. Selling the services described by the professor to poorly trained and un or under employed that Flint is largely populated with will not even pay for their $100-$150K student loans.

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