American Manufacturing and Employment

In a thread at the League of Ordinary Gentlemen I argued that U.S. manufacturing output was not in decline.  Not to be pushy, but just to back up my claim with data, here is a chart from Bureau of Economic Analysis data, showing the value of U.S. manufacturing from 1987 to 2009.  (You used to be able to download data from well before ’87, but not anymore, which is frustrating.)  The valuation is shown in a chain-type price index, which is just some fancy technical talk to say that it’s all be adjusted for inflation.  The year 2005 is set at the value 100, and the other years relate to that baseline.  You’ll just have to take my word for it that the beginning value of ’87 is itself substantially higher than what the data would show from the 1970s.

It’s true that we’ve lost manufacturing jobs.  The chart below, using Bureau of Labor Statistic data,* shows the dramatic–to many, frightening–decline in U.S. manufacturing jobs.

But the reason we can have increased manufacturing output with fewer employees is because of productivity growth.  By making more with less, we free up resources–particularly labor–to do other things.  Here's a chart, pulled directly from the BLS, showing productivity increases in manufacturing since 1987.

Economists consider this a good thing.  By freeing up resources, whether labor or anything else, we can produce additional things we want (whether goods or services).  However non-economists tend to worry that these “lost” jobs mean fewer people will be working.  However until the recent recession–which will ultimately be as temporary as any other recession–total employment in the U.S. increased fairly steadily.  Even though the U.S. was growing at nearly a record pace, adding ever more new workers per year, we kept adding enough jobs to occupy all those new workers.  Below is a graph (BLS data again) showing the growth in the civilian labor force from 1987-2009, plotted against the unemployment rate.*  As you can see, our unemployment rate does its normal swings up and down, but has no steady growth, even though our labor force kept growing <i>at the same time</i> as we were losing manufacturing jobs.  That’s clear evidence that jobs were being produced in other sectors of the economy.

Of course we can legitimately wonder whether those new jobs pay as well as the old jobs.  That’s a thorny question.  To some extent it doesn’t matter as much as people think, because higher productivity and cheap imports add up to the goods we want being less expensive.  It’s not just how much money you make, but how much you make in comparison to how much things cost.  (I have a Zimbabwean $10 trillion bill from a few years ago, big numbers, but it’s actual purchasing value was essentially zero.)  Still, that’s little comfort if your income plunges faster than the price of computers.  Another part of the answer is that some of the newly available jobs pay better and some pay worse–it really depends on a) the skills the worker has to offer and b) where the worker is.  Nearly any laid off auto worker in Michigan is clearly in the wrong geographic location to command anything approaching their former salary.  Even skilled engineers are moving out.  But also, any laid off auto worker whose skill consisted of what was effectively unskilled labor, or whose skills don’t transfer well to the new jobs available, is really in trouble.  Lots of the new jobs that become available also don’t require much skill, but unlike the old days of the auto industry, they’re not going to pay people above the value of their labor (the auto industry was able to do that for a long time due to lack of competition, which allowed them to pass on the extra costs to consumers; that’s not going to happen again even if we jack up tariffs on imports, because so many “foreign” manufacturers are now in the U.S.).

But a lot of the new jobs becoming available  are in fact high-skilled jobs, ones that are hard to outsource just for that reason.  And this is where education comes into play.  A highly educated work force is a more productive work force, but additionally specific fields are more in demand than others.  And this is where I have great worries about the U.S.  We still have too much of an expectation of being able to make a solid middle class living without having the requisite educational attainment.  And our K-12 education is dreadful and does not produce people with any discernible skills at all (and I mean intellectual, not just technical).  And as a consequence, we aren’t getting enough students going into the high-value, high-demand fields, so we’re importing people for those areas.

A majority of our scientists and engineers are foreign-born, because Americans aren’t going into those fields.  And I’m all for importing labor, just as we import any other valuable resource, but as the rest of the world develops, the competition for those imported scientists and engineers is going to become much tougher.  That was starting to heat up just before the recession hit, and will only get worse.  China’s going to be bringing back a lot more of its mathematicians, physicists, etc., who are getting their PhDs in the U.S.  India is becoming a market where those skills are in high demand, too.  And those are a couple of pretty good size countries, that could suck up a whole hell of a lot of that kind of skilled labor as they grow.

In summary, the U.S. has been performing far better than most critics realize, but it is going to get more competitive for us as the rest of the world develops, and there’s going to be an increasing wage gap between well-educated/high-skill and poorly-educated/low-skill labor.  Many people will look at that and worry about increasing income disparities, and use words like “feudalism,” but it will really be about how much economic value any of us has to offer.  We like to think that everyone deserves a living wage, but it can’t be a one-way street.  People need to be contributing value to society to expect to get value from society.  That’s a bit harsh sounding (and I’m not arguing for eliminating the social safety net, as it can help people return to being productive contributors when they run into short-term problems, and I’m all for taking care of those who have long-term problems that prevent them from being able to contribute, even if they’d like to).  It’s a harsh reality that isn’t too likely to change, so people–particularly younger people who aren’t relatively locked into particular paths yet–need to take seriously, just for their own well-being.

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*BLS did not provide the annual data, so the numbers shown are the averages of the monthly numbers.  I.e., 1987’s value is the average of all monthly values for1987.

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About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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2 Responses to American Manufacturing and Employment

  1. Michael Heath says:

    The drop in employment since ’99 was not primarily driven by productivity, it was driven by the rise of manufacturing volume in other countries. While I don’t have the data to validate this, I lived it and while there has been productivity gains, they’re no match for moving business offshore for the demand in developing economies their finished goods be built in-country.

    The fact we’ve been able to grow the value of our output is probably more reflective of global growth which is driving increased new products launches here but also demand for equipment still built here which develops countries (Catepillar). Here’s an illustrative example: a large subcontractor, one of the biggest in the electronics industry, dropped 80% of its headcount in the states from 2001 – 2003 while maintaining its headcount globally while also increasing its sales in that time by about 10% (after 35% growth rates in the ’90s). This massive transition of business off-shore was reflective of increasing comfort by their customer base not only agreeing to have their products built off-shore, but demanding it. Their competitors and OEMS building the same types of products were doing the same as well.

  2. Michael Heath says:

    Strike 1 – sorry for the above. Retry:

    The drop in employment since ’99 was not primarily driven by productivity, it was driven by the rise of manufacturing volume in other countries where I bet we’ve lost global market share. While I don’t have the data to validate this, I lived moving incredible volumes of business off-shore along with watching the entire extended supply chain do the same. And while there have been productivity gains, they’re no match for the amount of lost opportunities to build products here along with increased demand in other parts of the globe increasingly demanding their demand for goods be manufactured in their country or in their regional trading bloc.

    The fact we’ve been able to grow the value of our output is probably more reflective of global growth which is driving increased new products launches here where the high-volume is built off-shore, along with increased demand for equipment still built here which developing countries require to build-out their infrastructure (Catepillar).

    Here’s an illustrative example: a large subcontractor, one of the biggest in the electronics industry, dropped 80% of its headcount in the states from 2001 – 2003 while maintaining its headcount globally while also increasing its sales in that time by about 10% (after 35% growth rates in the ’90s). So while they had some productivity gains, the huge decrease in employment was primarily due to moving business off-shore. This massive transition of business off-shore was reflective of increasing comfort by their customer base not only agreeing to have their products built off-shore, but demanding it – often due to increasing regional protections such as in Europe and Asia for their end-products. This entity’s competitors and OEMS building the same types of products were doing the same as well. In addition we were moving large volumes to Mexico for products sold in the U.S. which used to be built exclusively in the states – in some cases billions of annual business per business entity. A rough rate would be for every billion of business done off-shore, about 7,000 Americans lost their job though that number swinged wildly both ways given the type of business.

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