The Nineties were a great decade for technology, grunge, and the stock market. However, the decade that made Nirvana a household name was troublingly quiet for manufacturing. Following the great boom period of the eighties, the nineties started off with a recession. This recession was relatively small compared to others in the twentieth century, with GDP dipping a mere 100 billion in 2009-adjusted dollars (see chart below). This recession wasn’t a typical recession, however: an unprecedented phenomenon occurred. During past recessions, output would fall and unemployment would rise, and once the recession ended, unemployment would fall and output would rise. The recovery of output during the early nineties recession was relatively swift, but as GDP recovered, unemployment continued to grow. The bulge in unemployment peaked in mid 1992, nearly a full year after the recession was considered to be over. This is what was economist Nick Perna coined as a Jobless Recovery.
Being the first instance of a Jobless Recovery, many studies have been performed on the early nineties recession to explain why this is so. One of these is an article released by the New York Federal Reserve in their publication Current Issues in Economics and Finance. In their article, written by the former Commissioner of Labor Statistics for the New York Fed, Erica L. Groshen, and Executive Vice President of the Markets Group for the New York Fed, Simon Potter contend that the cause of the Jobless Recovery is due to unprecedented structural change. Unemployment in a recession can be divided into two types: cyclical and structural. They define cyclical unemployment as “reversible responses to lulls in demand, while structural adjustments transform a firm or industry by relocating workers and capital” (2). Cyclical unemployment is typically reversible, with firms rehiring their old workers shortly after the recession ends. Conversely, structural unemployment is caused by a shift in industry, and the largest of these labor shifts causing the structural changes adversely affected manufacturing the most
Structural change is dangerous particularly for manufacturing because of the typically highly specified, yet unskilled nature of most jobs. In instances of economic downturn, usually due to the business cycle, the job losses associated with cyclical shocks are temporary: at the end of the recession, industries rebound and laid-off workers are recalled to their old firms or readily find comparable employment with another firm” (2). Workers that were displaced by the cyclical lay-offs will quickly find employment, typically at the same firm, shortly after the recession ends. Conversely, job losses due to structural change “are permanent: as industries decline, jobs are eliminated, compelling workers to switch industries, sectors, locations, or skills in order to find a new job” (2). The problem with these structural manufacturing changes was that the new industries that arose during the nineties were highly-specialized service jobs, and the creation of jobs like computer programmers. Many people that were laid-off had only a high school education. For many the expensive costs associated with going to back to school or getting a degree were not viable. This displaced many workers, aggravating the urban decay in many manufacturing towns like Cleveland, Detroit, Pittsburgh and the south side of Chicago, which drove away even more jobs.
What causes these drastic structural changes during the early nineties recession that caused the Jobless Recovery? Economists haven’t pegged it to a single event or issue, but, rather there are multiple possibilities coming together to cause the shifts. Groshen and Potter speculate that there are two possibilities that drove the structural changes in the early nineties recession that effected manufacturing. Firstly, the changes in monetary and fiscal policy may have caused a reduction in cyclical swings, causing structural swings to be the only form of change in the economy. The final possible cause of the structural changes may be the innovations in management systems, particularly those adopted by manufacturing, caused for productivity to boost, forcing layoffs. Outside of the causes cited by Groshen and Potter, I will lay out what others have pegged to be causes of these structural shifts. These additional theories are that the rise of larger conglomerate and many smaller firms closing up shop, and, finally, the effect of trade on manufacturing in the United States.
Adoption of many neoliberal fiscal and monetary policies throughout the Eighties allowed for the fluctuations in output from the business cycle to essentially be priced into the market. “If policy successfully counteracted the transmission of fluctuations to the most cyclically sensitive portions of the economy, then the feedback effects from these sectors to others would no longer deepen recessions. (5)” Today, recessions are not as tied to the business cycle as they used to be, which drove many adjustments in the economy to be structural, rather than cyclical.
During the nineties, many companies adopted new management strategies in order to boost efficiency in their supply chains and manufacturing processes. These changes may have saved companies money, but it also allowed for structural changes in employment. Firms that have adopted these management systems are more “likely to see a recession not as an event to be weathered but as an opportunity—or even a mandate—to reorganize production permanently, close less efficient facilities, and cull staff” (5). Troublingly, firms viewed the early nineties recession to reevaluate their corporate structure, and to boost their stock, by laying off some of their workforce. The nineties saw many manufacturing companies in the United States adopt new, buzzword-laden policies and strategies for production in their plants. Plants saw major shifts in how they did their work under strategies like the Toyota Production System, of which one of the major tenants was one plant manufacturing one product. This caused a lot of facilities to move, merge or close which was expensive and the labor force took the brunt of these costs. Additionally, many of these initiatives were designed to boost productivity, and in many cases these initiatives succeeded. Despite these new increases in productivity, demand for the products produced stayed relatively stagnant. This made many extra workers, that were important to their roles in production, to become not necessary at their respective company. Outside of the supply chain, in the C-suite, aggressive CEOs were adopting management strategies of closing plants and simplifying their product lines. CEOs like “Chainsaw Al” and “Neutron Jimmy” household names. Some of the policies adopted included “performance-based executive compensation” which “enhanced managers’ incentives to adopt more efficient staffing and inventory control practices” (5). These more aggressive incentives for management meant that more jobs would be slashed to save money.
Another phenomenon occurred during the nineties that was relatively unprecedented. Prior to the nineties, most manufacturing in the United States was done by small and large firms alike. Up through the nineties, however, while large manufacturers decreased, small firms grew relative to their industry, while their number of shipments and percentage of value added stayed relatively the same. In their scholarly article, titled Small North American Producers Give Ground in the 1990s, Baldwin, Tarmin and Tang contend that “small manufacturing plants differ from their larger counterparts in a number of ways. They typically are less productive, less capital intensive, pay lower wages and are more likely to fail” (349). The shift from large to small in the United States is indicative of larger macro shifts which ultimately effect employment and productivity. Baldwin et. al. cite multiple causes behind this shift. Firstly, the rise of small firms “may reflect the increased need for the type of flexibility that small firms offer” (349). This, they contend is most likely due to changes in technology, which increases their relative productivity. These small firms typically produce niche, high precision products with a small product line in higher quantity. An example of this is a machine shop that is a sole producer of drive shafts for forklifts or a special type of hose clamp used in airplane engines. These niche products are widely used and are in high demand due to their relative scarcity. Because of this, small firms stand to benefit from the innovations of the eighties and nineties. Conversely, employment at large firms suffered because of this automation technology. New, relatively cheap, technologies like computer numeric control machining, welding robots, and other automated process controls allowed for one person to do the work of would have taken ten or more. Firms saw this an opportunity to lay-off more workers. This is why the apparent growth for small firms was artificial: they weren’t hiring, but rather maintaining their labor force, while large firms were downsizing. Despite the new technology, demand for these products remained relatively flat, as evidenced by no change in number of shipments or value added. This resulted in the manufacturing industry to appear to be staying the same, while in reality it was decaying.
One of the biggest policy decisions made in the nineties that had a detrimental effect on trade was the North American Free Trade Agreement. This was an agreement between the United States, Mexico and Canada creating a trade bloc for the three countries. Provisions included intellectual property laws, environmental protection, restrictions on agricultural quotas and transportation infrastructure. The last of these provisions caused the greatest harm to manufacturing in the United States. Now, firms had the opportunity to take advantage of cheap labor in Mexico without paying large tariffs and exorbitant shipping costs associated with trucking across borders. Car parts manufacturers particularly took advantage of these opportunities, making small parts in Mexico and shipping them to assembly plants in the United States. Eventually, companies began to move complete assembly operations to Mexico. At the beginning of the decade, the US manufacturing trade deficit remained less than one hundred percent, meaning the US was exporting more manufactured goods than being imported. In 1994, however, when NAFTA when into effect, the deficit broke one hundred and continued to rise, showing no signs of slowing throughout the rest of the decade. In his report discussing job loss due to manufacturing, Economic Policy Institute senior trade policy economist, Robert E. Scott states that “exports boost the demand for U.S. output while imports reduce demand for U.S. output” (Manufacturing Job Loss). While the effects of NAFTA may have not been felt well into the later part of the decade and early 2000s, the access to cheaper labor sealed manufacturing’s fate, forever changing the US economy.