Background

Virginia’s Manufacturing Sector

Manufacturing remains a critical and evolving component of Virginia’s economy. In 2006, 296,054 individuals were employed in Virginia’s manufacturing sector. Manufacturing accounted for 8.1 percent of all statewide employment that year, down from 14.8 percent as recently as 1990.⁴.However, this decline in employment is indicative of both weakness and strength. On the one hand, it is partly attributable to low-skilled manufacturing (e.g., textiles and furniture) moving off-shore in search of cheaper labor. On the other hand, it is also reflective of technology-driven increases in labor productivity (e.g., in electronic equipment, paper, semi-conductor, steel, and transportation equipment production) that have significantly enhanced industrial efficiency and reduced the need for labor, including new lean manufacturing techniques that have resulted in the outsourcing of some traditionally in-house operations, such as information technology.

Even with these reductions in employment, manufacturing still plays a major role in the state’s economy. It remains the state’s 4th largest sector in terms of private employment.⁵ It also ranks 8th with respect to average monthly earnings.⁶ Moreover, these statewide statistics do not adequately convey the extent to which manufacturing continues to serve as the backbone of several of the state’s regional economies. For example, where manufacturing constitutes only around 8.1 percent of statewide employment, in Southside Virginia it accounts for 18.6 percent of employment, in Southwest Virginia 18.3 percent, in the Valley Region 16.4 percent, and in Hampton Roads 9.6⁷ percent. In addition, these jobs pay wages that are significantly above the average for these regions. In Southside Virginia the average annual wage in manufacturing is 36.3 percent above the regional average, in Southwest Virginia 26.9 percent above, in the Valley Region 26.1 percent above, and in Hampton Roads 36.2 percent above.⁸

Finally, it is important to note that the true impact that manufacturing has on Virginia’s economy far exceeds its own direct employment. Because of the nature of manufacturing, manufacturers tend to purchase more inputs (e.g., raw materials, intermediate manufactured goods, energy resources, and labor) than other sectors of the economy (e.g., the service sector) and they tend to purchase a larger proportion of those inputs locally. As a result, the ripple effects that manufacturing has on the state economy tend to be much greater than those generated by other sectors.

In addition, because most local and state tax regimes were first created and implemented more than a century ago, they were designed to capture tax revenue from an economy that was almost solely comprised of agriculture and manufacturing. The residual effect of this artifact of history is that the instruments of state and local taxation tend to disproportionately target manufacturing relative to other sectors of the modern economy, such as the ever burgeoning professional services sector. Because of this, manufacturing also tends to contribute proportionately more in tax revenue than do other sectors of the economy.

For these reasons, it is not surprising that according to a recent study by the Virginia Economic Development Partnership, the combined direct (i.e., expenditures by manufacturers on wages and other inputs) and indirect (i.e., the ripple effects that the direct expenditures have as they spread out across the state’s economy) economic impact of Virginia’s manufacturing sector is $172.0 billion in annual economic output, $6.3 billion in state and local tax revenue, and 1,015, 971 jobs.⁹ Put simply, this means that some 27 percent of the total number of jobs in Virginia are tied to, and dependent on, the manufacturing sector.