The U.S. supply chain is generally recognized as an integral part of the American economy. From Intel’s semiconductors to Microsoft’s enterprise software, the supply chain builds the goods and services that businesses need. But for all of its importance, no one has identified what industries comprise the U.S. supply chain economy, quantified the number and quality of jobs it contains, or assessed how much it matters for innovation. We attempted to answer these questions by creating a novel categorization of the U.S. economy that reveals new ways to drive American growth and innovation.
The U.S. supply chain economy is large and distinct. It represents the industries that sell to businesses and the government, as opposed to business-to-consumer (B2C) industries that sell for personal consumption. The U.S. supply chain contains 37% of all jobs, employing 44 million people. These jobs have significantly higher than average wages, and account for much of the innovative activity in the economy. The intensity of Science, Technology, Engineering and Math (STEM) jobs, a proxy for innovation potential, is almost five times higher in the supply chain economy than in the B2C economy. Patenting is also highly concentrated in supply chain industries.
Why are supply chain industries the source of so many high-paying jobs and so much innovation? One reason is that supply chain industries have downstream linkages to multiple industries, which allows the innovations they create to cascade and diffuse across the economy, potentially increasing the value of those innovations.
Think, for example, about the semiconductor, a general purpose technology, which went from an invention developed in the supply chain by Intel to being in almost every consumer technology imaginable. In the late 1980s and early 1990s, a government and industry partnership called SEMATECH identified technical barriers and developed a roadmap for diffusing semiconductor technology, in what is considered one of the most successful industrial policy interventions in recent years. In fact, our analysis shows that semiconductors are sold to over 60% of U.S. industries.
Modern equivalents of semiconductors reside not just in goods but increasingly in services like cloud computing and enterprise software that have been transforming many industries. Cloud computing services, for example, are sold to more than 90% of U.S. industries. These services are critical to the economy, as they allow businesses to store, process, and access important data.
The Importance of Supply Chain Services
Given the contribution of the supply chain economy to innovation and well-paying jobs, it is important to understand exactly what industries comprise this segment. Traditional examples of suppliers are metal stampers or plastic injection molders – businesses that manufacture parts to be used in a final good. As we are all aware, manufacturing employment has declined significantly, both overall and in the supply chain, to the distress of many in America. This has led to a pessimistic view of the economy. The policy response has focused on “bringing manufacturing back.”
However, this traditional categorization which emphasizes manufacturing over services falls short. Only 10% of employment in the economy is in manufacturing, and 90% is in services. It is commonly thought that most of those service jobs are low-wage occupations at restaurants or retail stores, while the manufacturing jobs have higher wages. But not all services are the same. With our new categorization, we can separate supply chain service jobs – which are higher-paying – from the Main Street service jobs that tend to be lower paying. These supply chain service jobs include many different labor occupations, from operation managers, to computer programmers, to truck drivers. They comprise about 80% of supply chain employment, with an average annual wage of $63,000, and are growing rapidly.
Taking the work one step further, within the supply chain services category, we have identified the subcategory of supply chain traded services – i.e., those that are sold across regions like engineering, design, software publishing, cloud computing, and logistics services, among many others. This subcategory has the highest wages and STEM intensity in the economy ($80,800 and 19%), with average wages 3 times higher and STEM intensity 18 times higher than Main Street services, and these jobs are growing fast. This growth may reflect the evolution of many large companies from manufacturing to services over the past decades, including IBM, Intel, Dell, and GE, among others.
Our supply chain economy framework leads to a more optimistic view of the economy. If we were to focus on supporting supply chain services, particularly those in traded industries, the result might be more innovation and more well-paying jobs in the United States.
What does this new categorization mean for economic policy? Here are three ideas focused on improving suppliers’ access to skilled labor, buyers, and capital.
First, we need to invest in skilled labor. The supply chain has the majority of STEM workers, of which America has a shortage. And while many companies are having difficulty finding skilled workers, service suppliers are most at-risk since their innovations are highly dependent on access to and retention of talent. Immigration policies that give greater access to this labor pool are helpful.
Second, we should support regional industry clusters. Suppliers produce inputs for businesses, and therefore, they particularly benefit from being co-located with their buyers in industry clusters. Catalyzing and strengthening organizations that support regional clusters is one way to promote buyer-supplier collaboration.
And finally, we must ensure that suppliers have access to capital. STEM-intensive service suppliers often produce innovations that cannot be patented, making it difficult to raise outside funding. Having pro-active government policy – through loan guarantees or credit support for suppliers – can help ensure stable and efficient access to capital for these suppliers to start and grow.
Our new categorization of U.S. industries has revealed a large and dynamic supply chain economy. In particular, service suppliers have a crucial role in driving innovation and creating well-paying jobs. Rather than an approach that relies solely on “bringing manufacturing back,” we must shift our policy solutions to focus on cultivating the supply chain service jobs that will drive America’s economy forward.