Like archeologists digging on a remote hillside, business researchers have unearthed an important segment of the United States economy all but hidden from traditional innovation policy, yet accounting for tens of millions of jobs crucial to America’s ability to produce goods and services.
The research rethinks what academics and practitioners have simply called the supply chain—a loose federation of individual suppliers that feed companies with the goods and services necessary to create products for consumers and businesses. But a deeper look reveals existence of an important “supply chain economy.”
According to the researchers, “Supply chain industries are a distinct and large segment of the economy. In 2015, they accounted for over 53 million jobs, 43 percent of US employment.”
“We think this is a breakthrough—a new way of categorizing the economy that recognizes the unique role of suppliers, and seems to have implications for policies that promote innovation and good jobs,” says the study’s coauthor, Harvard Business School Senior Fellow Karen Mills.
For example, the research challenges the focus on reviving the manufacturing sector as the main way to rebuild the American economy. Since 2000, domestic manufacturing jobs have slid on a roller-coaster drop, falling more than 30 percent, or 5 million jobs, largely due to import competition and automation. About 12 million jobs remain in the sector.
“We think this is a breakthrough—a new way of categorizing the economy …”
For many politicians and policymakers, the best prescription is to rebuild the country’s ability to make things, particularly end products. The new supply chain research suggests an expanded view that innovation and well-paying jobs can also come from the suppliers of services.
‘How is the supply chain working?’
When Mills worked as Administrator of the US Small Business Administration in the Obama White House, she noticed a secret national treasure: A booming supply chain of parts and services made up of innovative, large and small businesses across the country. Nobody seemed to know, however, all the industries that comprised that sector or how many jobs it contained.
Two years ago, she teamed with Mercedes Delgado, professor at Copenhagen Business School and research scientist at the Massachusetts Institute of Technology, who had a unique way to conceptualize and quantify the supply chain economy using US Census data. Their working paper was released in December, A New Categorization of the U.S. Economy: The Role of Supply Chain Industries in Innovation and Economic Performance.
They discovered that supply chains represent an enormous part of the United States economy, and are the source for its highest paying jobs. What’s more, most of those jobs are not in supplying parts, but rather in supplying services, such as in engineering, computer programming, and design.
Their findings offer a new way to break down the US economy beyond the traditional manufacturing-services divide, and to look instead at the hidden role of the supply chain economy in powering innovation and employment.
It’s not surprising that most economists have focused on manufacturing when it comes to innovation. “It’s where the majority of patents are, which is something we are able to measure,” Delgado says. Looking at the size of the manufacturing sector, however, it represents less than 10 percent of US employment. “It can’t be that such a small part of the economy is driving all of the growth opportunity.”
How supply chains drive innovation
The supply chain economy has three important attributes that make it a source of innovation:
- The creation of specialized inputs can produce value in a wide variety of different contexts. That’s true whether we’re talking about a new semiconductor tailored to the computer industry, or a service such as cloud computing or design and logistical services. “The process of creating those specialized inputs creates new knowledge, which eventually leads to more innovation,” Mills says.
- Supply chains have a large number of linkages to many different downstream industries. “They have many layers upon layers of buyers,” Delgado says, “so those innovations can cascade and diffuse throughout the economy.” When it comes to semiconductors, for example, the researchers found that the industry now supplies a surprising 65 percent of all industries. With cloud computing services, the number is even higher because companies need them to transform everything they do. “New technologies in the supply chain, such as artificial intelligence, have the capacity to similarly ripple through the economy in a way that consumer products simply can’t.”
- The supply chain economy leads to geographical clustering, leading to even further innovation. As suppliers co-locate with buyers in industry clusters, they share ideas and concentrate talent.
In order to get a handle on the impact of the supply chain economy, Delgado and Mills examined the input-output tables of the US Census Bureau, which measure the amount companies sell to the government and businesses versus to consumer households. They grouped industries into supply chain versus business-to-consumer (B2C), to find the percentage of outputs in each of these areas.
“We find that the supply chain economy is a distinct and large segment of the economy, and includes manufacturers and primarily service providers.”
An industry such as breakfast cereals, for example, sells more than 90 percent of its output to households; semiconductors and cloud computing sell almost 100 percent to businesses. “When those inputs go into other industries, it can transform them and generate more innovation,” says Delgado. “It can have a multiplying effect.”
Once they categorized industries this way, it became clear that manufacturers that sell directly to consumers are not creating the best jobs. Supply chain industries comprise 43 percent of jobs nationwide, and their average wages are 70 percent higher than those in B2C industries: $65,800 versus $38,800.
In fact, the highest paying jobs are not in companies that are making parts, but in those providing supply chain traded services, where average wages are $83,500. That fact is ordinarily obscured because service suppliers are usually lumped in with direct-to-consumer or “Main Street” services (think retail and restaurants), which have the lowest average wages, $29,400.
“We find that the supply chain economy is a distinct and large segment of the economy, and includes manufacturers and primarily service providers,” according to the paper. Mills adds, “We feel we have contributed a new insight and perspective about lots of good jobs that are being created in important industries that are hidden from view.”
Implications for policymakers
The findings have many implications for policymakers, the researchers say.
Since the supply chain service category also has the highest percentage of STEM workers, these results argue for increased investment in training in those skills—and perhaps increasing high-skilled immigration as well. “If we want to continue to grow our economy and become innovative and spur creativity, we need to make sure we have the inputs, including the workforce,” says Mills.
The findings also argue for policies that encourage clustering of supplier companies and buyers to magnify innovation, and creating more access to capital for suppliers. “When we talk to companies, we talk about partnering with suppliers, rather than squeezing every last dime out of them,” she says. “Being sure that suppliers have access to the workers and the capital they need is good for everyone.”
In ongoing research, Delgado and Mills are extending their analysis to other countries, many of which have similar input-output tables that can gauge the importance of their supply chain economies.
For now, however, it seems that the United States is a leader in this area—benefiting from being a country that produces innovative service inputs for businesses that produce final goods and services. Recognizing and building upon the importance of the supply chain economy will be a good way to keep America a leader in growth and innovation.
[About the Author]
Michael Blanding is a writer based in the Boston area.
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