Manufacturing Wage Premiums Have Diverged between Production and Nonproduction Workers

(PDF PDF icon) | ISSN 2770-5765 | DOI: 10.26509/frbc-rpr-20211109 Results Appendix

Abstract

A manufacturing wage premium is the average percentage difference between the wage a worker earns in manufacturing and the wage similar workers earn in industries other than manufacturing. Using standard wage regressions, we find that, between 1979 and 2018, the manufacturing wage premium declined much more for production workers (such as machine operators) than for nonproduction workers (such as managers or administrative assistants). As a result, the production-workers’ wage premium was 4 percent during 2015 to 2018, while the nonproduction-workers’ wage premium was 14 percent. The decline in the production-workers’ wage premium is broad based, both demographically and geographically. We argue that this decline was most likely caused by the loss of manufacturing production jobs, which put downward pressure on wages for this work. The decline in manufacturing wage premiums has important implications for the difficulties associated with recruiting manufacturing workers and for public investment in training for manufacturing jobs.

Executive Summary

Factory jobs are frequently assumed to pay good wages, and policymakers frequently use this argument to defend programs that support the sector, including subsidized training programs to address the so-called “manufacturing skills gap.” However, research shows that the difference between manufacturing wages and wages in other sectors—the manufacturing wage premium—has declined over time. This report documents the decline in the manufacturing wage premium between 1979 and 2018 and compares the wage premiums of manufacturing workers in production occupations (those who operate machines and assemble products) to those of manufacturing workers in nonproduction occupations (such as sales representatives, executives, and other office workers). Using standard wage regressions, we find that the wage premium for each group has fallen during the period we study, but it fell more sharply and further for production workers. This decline was broad based, both demographically and geographically.

The wage premium for production manufacturing workers relative to all nonmanufacturing workers fell from a peak of 12 percent during 1983 to 1986 to 4 percent or less from 2003 onward. To put this in perspective, consider the case of someone who earns $600 for a 40-hour week ($15 per hour) outside of the manufacturing sector. If she were to take a production job in manufacturing, the wage premium in recent years would mean that her weekly pay should increase by $24, which is much less than the $72 she could expect if the wage premium was still as high as it was in the early 1980s. In contrast, the wage premium for nonproduction manufacturing workers fell from 18 percent (a $108 weekly premium for our hypothetical job changer) during 1983 to 1986 to 14 percent (an $84 weekly premium) during 2015 to 2018. All else equal, the nation’s total wage and salary income would have been 0.6 percent higher in 2018 if these two wage premiums were still as high as they were from 1983 to 1986.

The decline in the production wage premium is most likely because fewer “factory floor” workers are needed in modern manufacturing operations, especially because of global competition and automation. This falling demand for production workers has put downward pressure on the wages they earn, which means that jobs in other sectors may be at least as attractive in terms of pay. Other research has called into question whether the manufacturing skills gap exists. The decline in the production wage premium provides an alternative explanation for why it is difficult for manufacturers to hire: They do not pay high enough relative wages to attract job seekers to a sector that is perceived as having rigid hours, a noisy work environment, and a greater chance of experiencing layoffs in an economic downturn.

Finally, we argue that policymakers should be careful when considering using public resources to support manufacturers in their search for and training of production workers. Manufacturing continues to provide significant economic benefits to the regions where it is located, which may justify policies to support and attract manufacturing facilities. However, since 2003, the production wage premium is less than one-third as large as the nonproduction wage premium, and relatively small. Thus, training workers for production jobs within manufacturing is likely to produce only modest long-term income gains. To best promote income gains, programs that train workers for manufacturing should be designed to place workers in nonproduction jobs, for which there remains a substantial manufacturing wage premium.

Figure 1. Manufacturing Wage Premiums Relative to Nonmanufacturing Workers for All Occupations Together, Production Occupations, and Nonproduction Occupations

Notes: The shaded area around each line is the 95 percent confidence interval for the wage premium. Each period is a set of four years. These wage premiums are based on hourly wage regressions that control for a variety of characteristics associated with wages. See Appendix for details.
Source: Authors’ calculations from CPS ORG (CEPR 2020).

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The views expressed in this report are those of the author and are not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System.