by Robert Kleine, Vice President and Senior Economist

This Advisor analyzes job growth in Michigan since 1988, with particular emphasis on the 1992 to 1994 period and the service sector.

Introduction

The economy is a major issue in this year’s gubernatorial campaign. John Engler credits his administration with creating 170,000 new jobs (wage and salary employment) in the past two years and for pushing Michigan’s unemployment rate to its lowest level in 20 years. Challenger Howard Wolpe responds that many of the new jobs are low wage and that Michigan is not creating the high-wage jobs that were created in the past.

There is some truth as well as exaggeration in both claims. Although Governor Engler has improved the business climate in Michigan, the economic expansion is the result of national and international developments that have been particularly beneficial to the motor vehicle industry, which is having one of its best years ever. His opponent claims that most of the jobs created in the past two years are low wage. While it is true that many of the new jobs pay less than manufacturing jobs, a number in the service industry pay relatively well, and manufacturing jobs have also increased significantly.

Employment Growth: 1988–94

Total Michigan employment (includes self-employed and agriculture) peaked at 4,267,000 in 1989 then declined to 4,125,000 in 1991. As of July 1994 total employment was 4,518,000, or 393,000 above the 1991 level, an increase of 9.5 percent.

The total employment number is based on a survey of households and is not as reliable as wage and salary employment, which is based on reports of actual employment at business establishments. These data indicate that job growth has not been quite as strong as shown by total employment numbers. Wage and salary employment peaked at 3,922,000 in 1989, then declined to 3,892,000 in 1991. In August, 1994 wage and salary employment was 4,095,000, up 173,000 from the 1991 level, an increase of only 4.4 percent. (See Exhibit 1.)

Employment Growth and Wage Rates: 1992–94

From August 1992 to August 1994, private wage and salary employment in Michigan increased by 167,300 jobs—about 80 percent of which were created in the past year. Of the jobs added since August 1992, about 48 percent were in services, 19 percent were in manufacturing (36 percent of the jobs created in the last year were in manufacturing), and 19 percent were in trade.

Exhibit 2 shows job growth for the last year and the last two years, by sector. (In most cases growth is shown for sectors in which the number of jobs rose by 1,000 or more.) Also listed is the average hourly wage paid in each sector. An addendum to the exhibit shows the distribution of new jobs by wage rates.

The largest share of new jobs, 24.8 percent, pay $7.50 to $10 an hour; nearly 17 percent pay $15 an hour or more. About 14 percent of the new jobs are not classified because (1) wage data are unavailable or (2) the sector is excluded because job growth was less than 1,000. About 60 percent of these unclassified new jobs are in eating and drinking establishments, most of which likely pay less than $10 per hour.

Clearly, many of the new jobs in Michigan pay relatively high wages. This is largely the result of two factors:

  • The strength of the motor vehicle industry, where wages are well above average
  • The good wages for many service jobs, particularly in the health and business services categories

In a recent report the Federal Reserve Bank of Cleveland argues that jobs in the goods-producing sector are not uniformly superior to those in the service sector.The bank’s data indicate that in 1992 the median service job paid only $19 per week (or 3.9 percent) less than the median goods-producing job, down from a difference of $82 per week in 1979.

Another interesting finding of the report is that the wage gap is much larger for workers with only a high school diploma. For such workers, goods-producing jobs pay about 20 percent more than service-producing jobs. This, again, underscores the importance of a good education in today’s job market.

Service Sector: 1988–94

There is some confusion about the definition of the service industry. The broad definition refers to the service-producing sector and includes retail trade; wholesale trade; services; finance, insurance, and real estate (FIRE); transportation, communications, and utilities (TCU); and government (which is sometimes treated separately). The narrow definition refers to the services sector (standard industrial classification [SIC] 80) that includes, among others, the categories of personal services, business services, and medical services. For purposes of this analysis we use the broad definition of the service-producing sector but have excluded government and the transportation and utilities components of TCU.

From 1988 to 1993, 196,000 jobs were added in the service-producing sector. Almost 75 percent of these were in only five industries in the services and retail trade sectors: eating and drinking places and general merchandise stores (retail trade), and business services, health services, and social services. About 70 percent of the jobs added in business services were in personnel supply firms. The fastest growing industries were social services, 40.3 percent; business services, 21.9 percent; health services, 17.9 percent; and general merchandise, 15.2 percent. Within the business service category, the fastest growing industry is personnel supply, with 47 percent growth. (See Exhibit 3.)

A small number of jobs were also added in FIRE, mainly in real estate and wholesale trade. Employment in the communications sector declined.

Job growth has continued strong in 1994. In August wage and salary employment was about 135,000 above August 1993 and 113,000 above the 1993 average. The August numbers are not strictly comparable with the average for 1993 as they are not adjusted for seasonal variation. In some sectors, such as amusement and recreation, employment in the summer tends to be higher than at other times of the year, meaning job growth is inflated.

Michigan Share

One way to look at how Michigan service industries are doing compared with service industries nationwide is to calculate Michigan’s share of national employment in each service category. As a rule of thumb, Michigan’s share of service employment should equal its share of U.S. personal income, which was 3.8 percent in 1988 and 3.6 percent in 1993.

As indicated in Exhibit 4, Michigan falls short in both the broad service-producing category and the narrower services category, with Michigan employment accounting for 3.4 percent of national employment in both categories (1993 data). This compares with 3.7 percent of total wage and salary employment and 4.6 percent of manufacturing employment.

Michigan falls well short of its personal income share in the following service-producing categories: hotels and other lodging, 2.1 percent; nursing and personal care facilities, 2.9 percent; legal services, 2.8 percent; private education (mainly colleges and universities, 1.8 percent), 2.3 percent; communications, 2.5 percent; and FIRE, 2.9 percent.

Michigan significantly exceeds its personal income share in the following categories: advertising, 4.9 percent; personnel supply services, 4.1 percent (both in the business services sector); residential care, 5.2 percent; and engineering and architectural services, 5 percent.

Michigan has about the expected share in health services, 3.8 percent, and retail trade, 3.7 percent. In this latter category Michigan is low on food stores, 3.1 percent, and high on general merchandise stores, 4.9 percent.

Between 1988 and 1993, Michigan’s share of the various service-producing categories changed little, with a few exceptions. Michigan lost significant share in the following sectors: service stations, mailing and reproduction, residential care, and job training and related services. Michigan gained share in engineering and architectural services and general merchandise stores.

Conclusion

The Michigan economy is as strong as it has been at any time since the 1960s. This is due in large part to the improved ability of domestic auto makers to compete with their foreign counterparts as well as to improvements in the national economy. It is also due to a small degree to efforts to improve the state’s business climate over the last 15 years.

Michigan is clearly more friendly to business, partly out of necessity, than in the 1960s and 1970s. However, workers in Michigan and the United States are not as well off in real terms as they were 20 years ago. The average hourly wage for production workers (in 1982 dollars) peaked at $8.55 in 1973. In 1993 the average wage was $8.01, 6.3 percent below the 1973 level. This decline is due to a number of factors, but most important are increased foreign competition, the decline in the power of labor unions, and, until recently, slow productivity growth.

In the 1960s less than 10 percent of the economy faced foreign competition. Today that figure is about 70 percent. In 1977, 26.2 percent of wage and salary workers were union workers; now only 15.8 percent are union members, the lowest number since the Great Depression. This is important, as the median weekly wage for union members is about 18 percent higher than for nonunion members. Finally, productivity (output per hour of labor) increased at an annual rate of about 2.9 percent from 1950 to 1970 but only 1.3 percent from 1970 to 1990. (From 1990 to 1993 productivity increased at an annual rate of 2 percent.)

The economy is not generating as many high-paying manufacturing jobs as in the past, but neither is it generating mostly low-paying food service jobs. The major change is that workers with little education can no longer find high-paying jobs on the factory floor. Most of the new jobs being created require well-educated workers, a college degree in many cases. Those who are not educated will be left behind.

The outlook for the job market in the future is bright due to a more competitive U.S. economy, new world markets opening up, and a slowdown in the growth of new job entrants. The only way to improve the standard of living of workers, however, is through increases in productivity, and the key to productivity growth is more saving and investment, improved education, and responsible federal fiscal and monetary policies. For those displaced by the changing economy, more money is needed for job training and to expand the federal earned income credit.

Michigan state government has a relatively small role to play in this process. That role is to maintain a good education system, keep taxes and other costs for business competitive with those in other states, invest in public infrastructure, and encourage existing businesses to expand in the state.

1Max Dupuy and Mark E, Schweitzer, “Are Service-sector Jobs Inferior?” in Economic Commentary (Cleveland, Ohio; Federal Reserve BAnk, February 1994).




Copyright © 1994

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