As the U.S. economic recovery continues to struggle, policymakers and economists are increasingly focusing on a manufacturing renaissance as one catalyst to a brighter day. While over the short term the acceleration of tepid job growth is the priority, earnings growth must also be a focus. Earnings matter to the long-term purchasing power of households, whose spending constitutes about 70 percent of U.S. economic activity. The purpose of this edition of Issues in Brief is to concentrate specifically on manufacturing earnings, a topic given remarkably little attention in economic literature.
The Manufacturing Sector Loses its Earnings Lead
Figure 1 shows real (i.e., inflation-adjusted) average hourly earnings for production and non-supervisory employees for U.S. manufacturing and for the private sector as a whole. As shown, in March 1976, real hourly earnings in manufacturing rose above the private sector average for the first time in the history of the series, and reached a short-term peak in February 1978. Private sector and manufacturing earnings subsequently experienced a volatile downdraft, dropping dramatically into the early 1980s, picking up modestly into the late 1980s, and then sliding once again to a trough in 1993. Throughout these years, factory sector earnings persistently exceeded the private sector average.
Things would soon change. As both private sector and manufacturing real earnings rebounded after 1993, manufacturing earnings’ lead narrowed considerably into the early 2000s. Even before the onset of the punishing global economic crisis there was a switch. In July 2006, manufacturing real earnings fell below the private sector average for the first time since December 1975—and have remained below since.
Drilling Down: A Complex Story of Domestic and Global Pressures
Earnings data for subsectors of manufacturing testify to the complex mix of forces that impact the paychecks of the factory sector workforce. Structural changes in the labor market have certainly mattered. MIT Economist David Autor notes that employment growth in the U.S. and other advanced economies is becoming polarized, with job opportunities increasingly concentrated in relatively high-skill, high-wage areas and in relatively low-skill, low-wage areas. The portion of the wage distribution that saw the weakest real earnings growth over the period 1989-2005 was the middle, roughly the group of earners between the 30th and the 70th percentiles of the distribution.
Computerization and other types of technological change that are negatively affecting middle-skilled occupations have certainly been a force in the manufacturing sector as the organization of production becomes increasingly technology-driven and productivity-oriented. A comparison of durable goods and nondurable goods earnings clarifies the paycheck impact of productivity success. Figure 2 shows that real hourly earnings in durable goods manufacturing has been consistently above that of the nondurable goods sector, likely a partial consequence of the generally faster labor productivity growth in durables.
Global forces, including import competition, export growth, and the expansion of the world industrial workforce, have also diminished earnings prospects for U.S. manufacturing workers. Drilling down further from the durables/nondurables division highlights a mix of domestic and global factors. Figure 3 shows the change in real average hourly earnings of production and non-supervisory workers for 20 subdivisions of U.S. manufacturing between 1990 and 2011. Over this tumultuous 21-year period, 7 industry sectors experienced an increase in their real hourly earnings while 13 experienced a decrease.
The workforce in the computer and electronic products sector enjoyed by far the largest increase in real average hourly earnings. Rapid innovation and productivity growth has most likely played a role in shifting the composition of employment in this sector toward higher-skilled occupations. Automation and the demand for skilled labor have also likely had a positive impact on wages in the petroleum and coal products sector.
Primary metals and beverages and tobacco were the two sectors that saw the largest drop in earnings, the former having been challenged by foreign competition and structural changes as production jobs move to smaller, more specialized types of mills. The shrinking size of cigarette manufacturers and the decline in smoking have likely contributed to downward pressure on average earnings in the beverages and tobacco sector.
Unsurprisingly, as shown in Figure 4, petroleum, transportation, and computers and electronic products, all of which have encountered forces that have favored the growth of high-skilled employment, had the highest average real hourly earnings during 2011. The industry sectors with the lowest hourly earnings that year, including leather, textiles, and apparel, are labor-intensive and have been negatively impacted by the global growth of the low-wage labor force.
The recent weakening of real earnings in the manufacturing sector relative to the private sector as a whole as well as the fact that only 7 of 20 manufacturing subdivisions have seen a real hourly earnings increase between 1990 and 2011 should be of concern. The difficulties that U.S. manufacturers are currently encountering in filling middle- and high-skilled positions may eventually have a positive impact on overall factory sector earnings as scarcity bids up wages. Through it all, the best policy response that the U.S. can offer to ensure a well-compensated manufacturing workforce is to invest in human capital so that domestic U.S. workers are prepared to meet the needs of a globally challenged U.S. manufacturing sector.
The author would like to thank Julia Edmonds, MAPI Economic Research Analyst, for excellent data and research assistance.
 As noted by the U.S. Bureau of Labor Statistics, average hourly earnings reflect not only changes in basic hourly and incentive wage rates, but also such variable factors as premium pay for overtime, late shift work, and changes in the output of employees paid on an incentive plan. These earnings data also reflect workforce shifts between relatively high-paid and relatively low-paid work.
 Autor, David, “U.S. Labor Market Challenges over the Longer Term,” MIT Department of Economics and NBER, October 5, 2010.
 Autor, David, “Explaining trends in wages, work, and occupations,” The Federal Reserve Bank of Chicago, Chicago Fed Letter, no. 261, April 2009.