Industrial Restructuring in Indiana

Growing economic and policy weakness

Indiana’s economy was long dominated by manufacturing of durable goods. For most of the past three decades, Indiana has led the nation with the highest share of employment and GDP in manufacturing. Unsurprisingly, political leaders of both parties tout the state’s ‘advanced manufacturing’ sectors, and herald new plant locations and expansions in glowing terms. It would almost seem a manufacturing renaissance is upon us.

That is not what is occurring. In fact, Indiana is in the midst of significant restructuring of its industrial economy. The state is moving rapidly away from employment in high-skilled, highly compensated manufacturing, to low-skilled, low paid factory employment.

This graphic illustrates the two decade employment change in manufacturing sectors a the 2 digit NAICS level (data from the Quarterly Workforce Indicators, the wage data is from 2021:Q3, the most recent available. the table below breaks down the job losses and monthly wages.

This is a pretty grim depiction of the future of manufacturing employment in Indiana. But, to be clear, manufacturing is doing just fine on the production side. 2021 saw the record manufacturing production in Indiana (yes, all time, inflation adjusted).

The growth in manufacturing just doesn’t bring with it employment. The little growth that is occurring is primarily in low quality jobs. In fact, as of Q3, 2021 (last quarter with full data), Indiana had only net growth of factory employment this century among those with less than a high school diploma.

Unsurprisingly, then wages have not grown, while become more volatile over time. as the seasonal stability of the jobs lessens. This is increasingly the result of food manufacturing, our only large growing sector.

So, what caused this and what does all this mean?

The United States employment in manufacturing peaked in 1979. Here in Indiana, it peaked in 1973. As a share of employment, it peaked immediately after World War Two. We are very good at producing goods, and consequentially can do so with fewer people.

We also import goods. The importation of goods shifts employment options away from the imported sector to other industries. I have written about it here, and shown a round up of studies about the issue here. A fabulous new study, that is forthcoming in the Quarterly Journal of Economics (arguably the best long form journal in the world), is likely to be the definitive word on the issue. They report about a quarter of U.S. factory jobs were lost to trade during the China Shock (2000-2014). Implicitly, then, productivity growth accounted for the remaining 75% of job losses.

Most of Indiana’s factory job losses were automated away. Maybe a third of them didn’t even go away, they simply transitioned firms from one manufacturing NAICS code, to a professional services NAICS code. Nicholas Bloom presents the classic work on that issue here.

The effect of the China Shock on productivity was significant, and led to faster growing, more productive U.S. factories. That’s a good thing in aggregate, and for most regions and workers. Trade and productivity growth improve real wages, thus purchasing power. But, if you are low skilled worker or live in a place with many other low skilled workers, the effect was not as rosy.

Indiana is increasingly a place with low skilled workers. In fact, Indiana’s dominant work demographic today is a high school graduate. This is at a time when for three decades more than 100% of the national job growth has gone to people who’ve been to college (and 81% to college grads).

As I’ve pointed out before, the focus on chasing smokestacks means we pour substantial money into capital investments that just don’t yield employment growth. I won’t cover that ground further, except to note that the money used to incentivize capital investment in manufacturing is not a free lunch. The money comes right out of the tax revenues used to provide public goods and services. It appears the more tax dollars you abate, the worse shape your communities will be in. That is both an empirical fact, and a pretty straightforward outcome of five minutes of hard economic thinking.

I don’t expect enthusiasm for industrial subsidies to end. There’s real money to be made, and the private sector economic development consultants are loathe to discuss that sort of change. Wise municipal leaders have moved past the focus on chasing smokestacks, but there are also many others still doing so. I refer to these places as the ‘control group’ in an experiment whose outcome we already know.

Indiana’s manufacturing industries will continue to restructure. The state does not enjoy a large, well educated workforce from whom to populate advanced manufacturing firms. So, we should expect growth in lower wage assembly operations, and significant growth in those factories that take the squeak out of a pig.

These lower wage jobs are very important to poorly educated workers and their families. They offer a growth opportunity that many did not have in secondary school, and provide a potential source of new immigrant population growth in communities that are otherwise in decline.

Still, the size of the focus on manufacturing as an economic engine in Indiana is woefully overblown by policymakers. The shift from high wage, higher skilled factory work to primarily lower wage, low skilled manufacturing employment does not offer hope for Indiana’s economic future.

If Indiana ever develops an economic development strategy, it must take one of two direct pathways. The state can either focus on issues beyond the transactional incentivization of business capital, or prepare for continued economic decline. There really isn’t a third option.