Roland Zullo is a research scientist with U-M’s Institute for Research on Labor Employment and the Economy (IRLEE). He and colleague Kallol Mukherji recently completed a study that examined the impact of manufacturing job losses on local jobs. The basic finding: the ripple effect of lost jobs in the motor vehicle manufacturing industry is much more serious and long-lasting than previously believed. Michigan Today asked Zullo about his study.

MT: You have been researching the way manufacturing job losses affect employment elsewhere in the economy. Can you give us an overview?

What we set out to do is examine how job loss in the motor vehicle sector affected local employment, looking broadly at industries close to motor vehicles, such as machinery manufacturing as well as sectors that may seem distant from motor vehicles, like education.We analyzed county-level data over the 2001 to 2008 period, which includes the automotive sales peak at the beginning of the decade and subsequent job loss due to the severe recession. During that time Michigan counties lost roughly 46 percent of jobs in the motor vehicle sector.

Every lost job in motor vehicles led to the loss of another eight.

What was different about our analysis is that we examined the effect of motor vehicle job loss on other jobs over a five year span; the current period plus four lagged years. Summing the associated job loss across all industries gave us a ripple effect of one to eight, meaning that for every lost job in motor vehicles, the nearby county lost eight jobs.

MT: One lost manufacturing job leading to eight other lost jobs? Could it really be that high?

The reason for the higher than expected job loss multiplier is that we looked at the effect over five time periods. Previous research found a multiplier of 2.5 to 3, but only for the current year plus one lagged year. My estimates for those two periods was 2.8—so right in the same ballpark.The surprise was in the longevity of the aftershock. Manufacturing-related regional job losses occur four years after communities experience job dislocations. It may even extend further, but we didn’t have the data to confidently test whether this was the case.

MT: Break down those numbers for us. Where do you see the biggest impacts?

Not surprisingly, sectors that serve the auto assembly and parts sectors were greatly impacted by the downturn. Machinery manufacturing, fabricated metals, and plastics and rubber products, for instance.However, the reach of the downturn also affected industries that are highly dependent on strong local economies, such as construction. We also detected a strong negative effect on professional services and public services.

MT: What was the most surprising or unexpected thing you found?

Perhaps the most surprising finding was that the ripple effect grew as time passed. Up through the second year (including the contemporaneous year) a job lost in motor vehicles equated with a loss of 1.5 jobs. By year four, this increases to over two jobs.In other words, the negative local employment effects from downsizing in motor vehicles is not short-term, but at least medium-term. The initial shock to a community is severe, but the effect becomes even more intense with passing years. Recovery takes quite a long time.Much of the reason is that while some sectors are affected immediately, for others there is a lag. K-12 public education, for instance, is hit rather hard two years after the motor vehicle downsizing. Not coincidentally, the deepest year of the recession was 2009, and now, two years later, public services across Michigan are under fiscal stress.

MT: You mention that professional and public services took a hit, and you also single out K-12 education as being affected. Normally we don’t think of schoolteachers and public employees being affected by auto layoffs.

The lag for public workers is partly due to the administrative time required for state and local governments to collect taxes and distribute revenues. State and local governments develop budgets based on revenues collected one or two years prior. For motor vehicles, the deepest year of the recession was 2009, so here in 2011 the fiscal crises has hit the governmental sector.Another possibility is that the working-age population moves away, taking with them their children in K-12. For teachers anyway, there might be less of a demand for them because school populations decline. We would expect a lag for this to happen as well.

MT: Is any economic sector immune?

In general, sectors unrelated to auto that serve national or international markets were immune. Agriculture and food manufacturing, two significant industries in Michigan, were unaffected by the loss of motor vehicle jobs.

MT: What are the implications for policy? The loss of manufacturing jobs has hit Michigan especially hard, but this is also a national issue. What kinds of things can the state and the country do in the face of these massive impacts on employment?

One myth we should abandon is that our economy can neglect manufacturing and successfully transition to an economy based on high end services, or advanced technology. The low-tech/high-tech dichotomy is over-simplistic, if not false. We found that professional, scientific and technical jobs were significantly affected by the motor vehicle layoffs, presumably because persons in these jobs work in and around manufacturing.

Exports are crucial to bringing wealth from outside the state into Michigan.

Every industry has a technical or design dimension that requires nearby professional skills. The idea that we can engineer products in Michigan, yet have the products made overseas, is a theoretical model without much applied supporting proof.More generally, it would seem advantageous for the state to adopt policy designed to reward or support firms that manufacture goods for export. If successful, wealth from outside of Michigan is then imported. More important, creating or sustaining manufacturing jobs provides gainful employment for the roughly half of the Michigan workforce without a college degree. We want to have all Michigan citizens active participants in the economy—as both workers and consumers. This is the way to achieve robust growth.

MT: Why would an export-based economy work better for Michigan than one based on, say, services or health care?

Generally, export industries, especially value-added manufacturing, bring more wealth into Michigan. They draw in money from outside the state, rather than just circulating it within the state. Also, value-added manufacturing provides gainful employment for citizens of all education backgrounds, especially when wage-earners are unionized.Services can also bring in wealth, and should certainly not be neglected. For instance, U-M is an education service that attracts tuition-paying students world-wide. Health care, likewise, is a high value added activity that creates many decent paying jobs.But U-M and our hospitals are the exception rather than the rule in regards to the effect of services on the economy. Most services operate locally (e.g. banking, real estate, health care) by serving nearby populations. And, in most instances a degree is required for someone working in a service to earn a middle-class income. Within hospitals, doctors and nurses usually do fine; housekeepers and custodians much less so.What this study revealed is how dependent local businesses are on the wealth imported and jobs created by the motor vehicle manufacturing sector. Michigan will in all likelihood never regain the jobs lost through the downsizing of that sector over the past several years. Then the question, moving forward, is what do we replace it with? I would suggest a focus on the existing manufacturing sectors that have viable export markets. Expanding these industries means importing wealth and creating gainful employment that will, in turn, revive local economies.

What do you think? Surprised by the impact of manufacturing job losses? Are you optimistic about Michigan’s economy? Think we should be pushing exports? Share your thoughts in the comments section.