By Thomas M. Bailey
From Foresight, Vol. 3, No. 4
published 1996
As we move deeper into the Information Age and leave the Industrial Age farther behind, major economic changes are underway. In the past, businesses expanded capacity with bricks and mortar; today, they do it with satellite links and fiber optics. Employees who once operated a stamping machine, a band saw, or a cash register now use computers to get information and make decisions based on that information. At the macro-level, the service-producing sector accounts for a larger and larger share of total economic activity, and comparative advantage is moving manufacturing jobs to lower-wage states, such as Kentucky, and even more dramatically to lower-wage countries.
The confluence of these factors has already had a significant-and mostly favorable-impact on employment and industries in Kentucky. Employment in high-technology manufacturing in Kentucky has risen since the late 1980s, even as it fell nationally. This growth has been well distributed in metropolitan and nonmetropolitan areas of the state. Employment in high-technology service industries has lagged the national average slightly but has still enjoyed rapid growth. In fact, employment in some high-technology service industries in Kentucky more than doubled in just five years. Unfortunately, most of the growth in high-technology service industries was concentrated in metropolitan areas, and, in terms of annual pay, Kentucky compares less favorably to the nation, particularly in high-technology services.
What is a high-technology industry? One common definition is an industry which spends more than an average percentage of net sales on research and development and employs more than an average number of scientists, engineers and mathematicians (Glasmeier and Barkley, Dahlgran, and Smith). A list of the industries considered high technology can be found in Table 1. The chemical manufacturing, petroleum refining sector, and instruments (which includes scientific and medical instruments, ophthalmic goods, and photographic equipment) sectors are considered high-technology industries. Only a portion of the machinery and computer equipment, electrical equipment, and transportation equipment sectors are considered high technology. For instance, farm machinery and equipment (a sub-class of machinery and computer equipment) and motor vehicles (a sub-class of transportation equipment) are not considered high-technology industries. The high-technology service sector is comprised of computer and data processing services and research and testing services.
These are not trivial industries. High-technology manufacturing industries employed more than 42,000 people in 1993 while high-technology service industries employed another 7,000. High-technology industries in Kentucky employ nearly as many people as the entire agricultural, food processing, tobacco processing and mining sectors combined (See Figure 1). Furthermore, employment in high-technology industries is growing much more rapidly than in some of the more traditional sectors of the economy.
Figure 1: Employment in Major Kentucky Industries, 1993
Kentucky's high-technology employment for 1993 and the percentage change from 1988 levels for the state and the nation are presented in Table 1. The diversity of the state's high-technology manufacturing base is evidenced by the fact that all but one of the high-technology manufacturing industries were present in Kentucky in 1993 (Kentucky had no firms producing guided missiles). In Kentucky, high-technology manufacturing accounted for 3.4 percent of all employment and 14.9 percent of all manufacturing employment in 1993, compared to 4.2 percent and 21.8 percent for the United States. Several of the state's largest manufacturing firms are classified as high technology. These firms include Ashland, Inc. (SIC 2910), Corning Inc./Dow Chemical (SIC 2820, 3820, and 3850), Emerson Electric Co. (SIC 3560), Lexmark (SIC 3570), and Martin Marietta (SIC 2810).
Overall, high-technology manufacturing employment in Kentucky increased by 12 percent, while the United States experienced a 12 percent decrease. Of the state's largest high-technology manufacturing industries-general industrial machinery, computer and office equipment, construction machinery, inorganic chemicals, and electrical industrial apparatus-all but computer and office equipment realized positive employment growth between 1988 to 1993.
The nation's high-technology service sector grew at a faster rate than Kentucky's, but Kentucky was not far behind (34 percent growth versus 29 percent). All high-technology service sectors were present in Kentucky in 1993. High-technology services accounted for 0.6 percent of all employment and 2.0 percent of all services employment in Kentucky in 1993, compared to 1.5 percent and 4.3 percent for the United States. The largest high-technology services employers in Kentucky were data processing and preparation, computer programming services, commercial nonphysical research, and testing laboratories.
Several high-technology service industries experienced remarkable growth-computer-related services (651 percent), prepackaged software (210 percent), information retrieval services (173 percent), commercial nonphysical research (161 percent), and computer programming services (126 percent). Data processing and preparation, the state's largest high-technology service employer, experienced a 9 percent job loss between 1988 and 1993. The employment growth rates of high-technology services were much higher than those for high-technology manufacturing, but the service industries started from a much lower base. High-technology manufacturing employed 5.8 times more people in Kentucky in 1993 than high-technology services.
Table 1: Employment Growth in High-Technology Sectors, Kentucky, 1988-1993
Strong employment growth is a positive for Kentucky, but another measure of high-technology development needs to be considered. Beyond employment growth, job quality is a rising concern for both citizens and policymakers. Annual pay per employee in high-technology industries, which is illustrated in Table 2, provides one measure of job quality. On average, high-technology manufacturing employees in Kentucky earned less in annual wages than the national average, $27,840 versus $36,800, but still earned more than the national average for all industries, $27,840 versus $22,990. Though most high-technology manufacturing firms paid their workers less in Kentucky than the national average, four sectors (plastics materials and synthetics, ordnance, general industrial machinery, and electrical distribution equipment) in the state paid their employees more than the national average.
Employees of Kentucky's high-technology service industries averaged $14,000 a year less than the national average, earning less than the national average in all industries. In some industries, Kentucky employees were paid less than half the national average. And while average annual pay in high-technology manufacturing and service industries was nearly the same for the nation as a whole, average annual pay in Kentucky's high-technology service industries was nearly $6,000 below high-technology manufacturing industries.
The U.S. economy appears to be shifting from manufacturing to services, even within high-technology industries. Kentucky, on the other hand, registered positive growth in both high-technology manufacturing and services. Several high-technology service industries experienced massive growth, but overall employment in these sectors is still well below high-technology manufacturing employment. High-technology manufacturing jobs appear to be of high quality when quality is measured by annual pay per employee. The high-technology services industries in Kentucky appear to be lagging far behind the rest of the nation in terms of job quality. If Kentucky follows the path of the rest of the nation, shifting from manufacturing to services, the job quality of high-technology services will need to be addressed.
Continuing critical evaluation of the quality of education and technical training is an obvious first step in bringing Kentucky workers to the level where they can compete for high-paying, high-technology service jobs. Of course, other reasons aside from education and training may exist for the large wage gap among high-technology service jobs. In fact, the skills of Kentucky's high-technology workers may be comparable to the rest of the nation in some industries. Economic analysts in the state will be able to identify possible, additional reasons for the wage gap if the issue becomes more of a concern.
Table 2: Annual Pay Per Employee in High-Technology Sectors
State-level statistics provide a broad brush with which to paint the current state of high-technology manufacturing and services in Kentucky, but the distribution of this growth provides a clearer picture of its impact on specific regions of the state. Figures 2 and 3 show where the growth in high-technology establishments occurred between 1988 and 1993.
As illustrated in Figure 2, nonmetropolitan areas gained slightly more of the smallest manufacturing establishments (those employing fewer than 20 people) than metropolitan areas-25 establishments versus 21. Nonmetropolitan areas also gained more new medium-size establishments (20 to 99 employees). Metropolitan areas, however, registered higher rates of growth among establishments employing more than 100. Notice that nonmetropolitan areas lost two establishments in the 500 to 999 employment range. Due to the size of these establishments, the job loss comes close to swamping the gains in smaller establishments that nonmetropolitan areas experienced. Overall, metropolitan areas posted greater employment gains.
Figure 2: Change in High-Technology Manufacturing Establishments by Firm Size, 1988-1993
The loss of large establishments in nonmetropolitan areas is regrettable, but the gains in smaller establishments is rather remarkable. Smaller establishments are sometimes preferred to large establishments for several reasons. They place less demand on public services and infrastructure (Barkley, et al.), and regions with a high participation of small establishments may be better able to resist fluctuations in the economic cycle than regions in which employment is concentrated in a few establishments (Sanchez).
Also, when a single, large establishment locates in a community the sudden increase in labor demand can place upward pressure on local wage rates. But several smaller establishments, filtering into a community over several years, may not cause the same sudden shock to labor demand. Small establishments may provide a smoother adjustment, allowing local firms time to respond to changes in wage levels. Of course, high wages are desirable to workers, but rising wages can cut into the profit margins of existing firms, threatening long-term stability. This delicate and complex balance between worker wages and firm stability needs to be appreciated. Workers may experience a short-term wage gain, but the same wage increase may cause a firm to close or move. In the ever-changing environment of a knowledge-based economy, the shift from a few large establishments to several smaller establishments should not be lamented; it should be heralded.
Establishment change among high-technology service establishments tells another story (Figure 3). Where high-technology manufacturing was spread across metropolitan and nonmetropolitan areas and across the various employment size classes, most high-technology service growth occurred in establishments employing from 1 to 19 people located in metropolitan areas. Only 19 percent of all establishment change occurred in nonmetropolitan areas. This suggests that a definite metropolitan bias exists among high-technology service establishments, maybe reflecting the common observation that a critical population density is necessary to foster services employment growth.
Figure 3: Change in High-Technology Services Establishments by Size of Firm, 1988-1993
Given the relative success of high technology in Kentucky, an appropriate next question is whether state-level and local-level policies can influence the location, expansion, or creation of high-technology firms. The academic research appears mixed. Some authors see incentives such as tax breaks and worker training grants as being important while others do not (Partridge, Ó hUllacháin and Satterthwaite, and Premus). Though financial incentives have conflicting results, nonfinancial incentives such as university research parks, enterprise zones, and high-technology incubator programs are seen as factors that can increase high-technology employment (Premus and Ó hUllacháin and Satterthwaite).
Almost all of the research suggests that traditional location factors such as access to markets, access to inputs, and transportation costs are not important to high-technology firms (Blair and Premus). Instead, the availability, cost, and quality of the labor force is seen as very important (Blair and Premus, Glasmeier, and Haug). A highly educated work force is necessary, but a certain degree of low-wage, low-skilled labor is also needed. High-skill workers are needed in the research, development, and design of products, while low-skilled workers are needed on the production floor of many high-technology manufacturing firms. The past success of Kentucky's recent growth in high-technology employment suggests an adequate mix of both types of labor exists in Kentucky.
Of course, finding less-skilled workers is seldom a problem. The real challenge is training our workforce for the high-skill jobs of tomorrow. To do so, educators must recognize the difference between a computer operator and a computer programmer. Teaching computer literacy is commendable, but education should not leave traditional mathematics and science behind. A current anecdote relates how a student beginning high school in Kentucky this past term had two computer classes, but no mathematics courses. If all we teach is computers, and not computing, we will be strapped into a future of data processing and preparation. The tables show that data processing and preparation is the largest high-technology services employer in the state. But it is one of the lowest paying service sectors, and this sector has actually been shrinking in Kentucky. To continue the positive growth in computer programming, software, and integrated systems design, students need to be armed with complex math and science skills. The past growth of both high-technology manufacturing and services suggests Kentucky is in a prime position to benefit from the Information Age. However, critical evaluation of the current system of education and technical training is necessary to ensure we are preparing Kentucky's workforce for future growth, not for employment in stagnant, shrinking, low-wage industries.
One factor that works in the state's favor is that employees earn less in Kentucky, on average, than in the nation. If the labor skills are comparable to the nation, then Kentucky may be able to lure additional high-technology employers away from the high-technology centers of Silicon Valley in California and Research Triangle Park in North Carolina, where wage inflation is common (Glasmeier). This is a loose argument, though, since the advantages of such high-technology centers many times outweigh the disadvantage of high wage rates. Besides, trying to lure or recruit firms from other states is short-sighted and, in many cases, self-defeating, in that it leads to dependence on the management decisions of firms controlled from outside the state. Kentucky needs to balance incentives that are designed to recruit firms with policies that foster local growth in high-technology and knowledge-based firms. The historical data presented above shine favorably on the state. A viable next step would be to ensure that high-technology entrepreneurs and fast-growing firms looking to expand have access to venture capital and management and consulting resources.
Barkley, D.L., Dahlgran, R.A., and Smith, S.M. (1988, August). High-technology manufacturing in the nonmetropolitan quest: gold or just glitter. American Journal of Agricultural Economics, 560-571.
Blair, J.P., Premus, R. (1987). Major factors in industrial location: a review. Economic Development Quarterly, 1, 72-85.
Glasmeier, Amy K. (1991). The High-tech Potential: Economic Development in Rural America. Center for Urban Policy Research, New Brunswick, NJ.
Haug, P. (December, 1991). The location decisions and operations of high technology organizations in Washington State. Regional Studies, 25, 525-541.
Partridge, M. (1994). High-tech employment and state economic development policies. Review of Regional Studies, 2, 287-305.
Ó hUllacháin, B., Satterthwaite, M.A. (1992). Sectoral growth patterns at the metropolitan level: an evaluation of economic development incentives. Journal of Urban Economics, 31, 25-58.
Premus, R. (1982, June 1). Location of High-technology Firms and Regional Economic Development. Joint Economic Committee, Congress of the United States.
Sanchez, A. M. (1992). Regional innovation and small high-technology firms in peripheral regions. Small Business Economics, 4, 153-168.
Mr. Bailey is a graduate research assistant in agricultural economics at the University of Kentucky. He gratefully acknowledges the comments of Stephan Goetz and Timothy Wojan of the Department of Agricultural Economics and TVA Rural Studies, respectively, and Michael Childress and Peter Schirmer of the Kentucky Long-Term Policy Research Center.