Project Syndicate: J. Bradford DeLong: Where US Manufacturing Jobs Really Went: In the two decades from 1979 to 1999, the number of manufacturing jobs in the United States drifted downward, from 19 million to 17 million. But over the next decade, between 1999 and 2009, the number plummeted to 12 million. That more dramatic decline has given rise to the idea that the US economy suddenly stopped working–at least for blue-collar males–at the turn of the century…
Tag: Manufacturing
NAFTA and Other Trade Deals Have Not Gutted American Manufacturing—Period: Live at Vox.com
Live at Vox.com: NAFTA and Other Trade Deals Have Not Gutted American Manufacturing—Period: Politically speaking, there was no debate on United States international trade agreements in 2016: All politicians seeking to win a national election, or even to create a party-spanning political coalition, agree that our trade agreements are bad things…. From the left… Bernie Sanders…. From the right—I do not think it’s wrong but it’s not quite correct to call it “right,” at least not as Americans have hitherto understood what “right” is—but from somewhere… now-President Donald Trump…. From the center establishment… popular vote–winning (but Electoral College–losing)… Hillary Rodham Clinton…. “I will stop any trade deal that kills jobs or holds down wages, including the Trans-Pacific Partnership. I oppose it now, I’ll oppose it after the election, and I’ll oppose it as president.…” The rhetoric of all three candidates resonates with the criticism of trade agreements that we heard way back when NAFTA was on the table as a proposal—not, as today, something to blame all our current economic woes on… Read MOAR at http://vox.com
This piece actually does only a third of what I wanted to do:
- Lay out how our trade agreements have not decimated manufacturing.
- Lay out what a properly-nurturing macroeconomic and industrial policy to increase the health of our important and valuable communities of engineering practice would be–but stress that such policies would not bring back mass manufacturing jobs.
- Account for the political mishegas.
But I only got through (1). And it is 8000 words. And I had to drop the extended notes and digressions that will go into the bibliographic essay…
Expenditure Shares, Price Measurement, and True Relative Labor Productivity Growth in Post-WWII Manufacturing: What the Aggregate Deta Suggest
Tuesday Morning Distraction: Well, I was supposed to be sitting three tables down from Aaron Edlin at the Claremont Peets this morning doing research. But I got myself distracted–convinced myself that I ought to right something about the sharp Matthew Yglesias’s (and why, Harvard Economics Department, was he not an economics major?) piece on premature deindustrialization. And then I got myself redistracted…
Let’s start with one of the standard graphs: the American share of (nonfarm) employment that is in manufacturing:
At the start of the 1930s manufacturing employment was 30% of nonfarm employment. It is now 9% of nonfarm employment. In the absence of our trade deficit in manufacturing, it would be 12% of nonfarm employment. Thus only one-sixth of the reduction in the manufacturing share of nonfarm employment can be traced to the emergence of our manufacturing trade deficit–six-sevenths of the share decline is due to extra-fast improvements in manufacturing labor productivity and to shifts in the types of goods and services that we demand.
How much of the 18%-point ex-manufacturing trade deficit decline in the manufacturing employment share can be traced to demand shifts? Answering that question requires taking a view on what an unshifted demand would look like. Another standard graph is the nominal share of manufacturing production in GDP:
On the same axes as the nominal share of manufacturing production, I have plotted a series called “real” obtained from the nominal share by (a) multiplying it by the chain price index for GDP and (b) dividing it by the chain price index for manufacturing. This is not the real share of real GDP that is real manufacturing production. It is the “real” share. “Real” shares calculated this way do not add up to totals. This is a ratio of two flawed aggregative index numbers scaled so that in 2000 the ratio matches the nominal share of manufacturing in GDP.
At the start of the 1950s manufacturing production was 27% of GDP (manufacturing labor productivity was in value terms some 5/4 of average labor productivity, including the farm sector), and it has since fallen to 11% of GDP (manufacturing labor productivity is still in value terms 5/4 of average labor productivity). But over the course of the last 70 years the measured price of manufactures has fallen relative to the measured price of GDP by 1.4%/year, so that all of the declining share of manufactures in nominal GDP can be, in some sense, accounted for as an extra-fast improvement in manufacturing productivity and thus a relative reduction in market prices.
If there were a single commodity called “GDP” and a single commodity called “manufactured goods”, then we would say that:
- The relative price of “manufactured goods” today is only 40% of its level 70 years ago…
- If the income and price elasticities of demand for “manufactured goods” were one, then we would have expected the decline in relative price to 40% of its initial value to be associated with a 2.5-fold multiplication in relative quantities, and for the nominal share of manufactures in GDP to remain the same. Thus if the “unshifted demand” has associated with it a manufactured-goods demand curve of unit price elasticity, all of the 18%-point fall could be traced to changes in our market preferences away from manufactures. But I see nothing in the world or in our culture to generate such a shift in tastes and thus in market demand away from manufactured stuff. Manufactured stuff is useful, really useful…
- If the income elasticity of demand for “manufactured goods” were one and the price elasticity of demand were zero, then we would have expected the decline in relative price to 40% of its initial value to be associated with stability in relative quantities, and for the nominal share of manufactures in GDP to fall on the same track as the price–as it has. Thus if the “unshifted demand” has associated with it a manufactured-goods demand curve of zero price elasticity, none of the 18%-point fall could be traced to changes in our market preferences away from manufactures.
For our demand for manufactured goods to have a price elasticity of zero seems to me to make little sense: Manufactured stuff is useful. When the price of manufactures drops relative to the price of other stuff, we ought to buy more manufactures–not, to be sure, enough to keep the share of our incomes we spend on manufactures constant, but somewhat.
My view is that our measurements have gone substantially awry, and that the price elasticity of demand is about 1/2. The speed with which the share of manufactures in nominal GDP has declined is, in my view, much more consistent with a manufacturing price and labor productivity growth rate differential of not 1.4%/year but more like 3%/year. That would suggest that the relative price of manufactures properly measured today is not 40% but 12% of its immediate post-World War II level, and that the right “real” share graph sees not a constant “real” share of manufactured goods in output, but rather a tripling of the share.
This has implications for the “true” rate of economic growth–an aggregate-scale underestimate of 0.3%/year from this channel alone…
Must-Read: Paul Krugman: Trade and Jobs: A Note
Must-Read: Ah. I’ve been waiting for Paul Krugman to write up something like this…
I think that he is, of course, correct. The estimated effects of the China shock on individual regions and labor markets is solid. Their aggregating up is fatally flawed pre-2008…
: Trade and Jobs: A Note: “Trade and jobs… The big story in the academia/policy space…
…Autor et al… estimated large losses from Chinese import penetration…. But… some conceptual issues… are important for interpreting the results…. I would begin by posing a counterfactual: what would U.S. employment look like if we had pursued policies such as Trump tariffs that prevented the large trade deficits in manufacturing we actually have?… A balanced expansion of imports and imports would have, to a first approximation, no effect on manufacturing value added, and an effect on employment only to the extent that import-competing industry is more labor-intensive than exports…. [So] what matters is the manufacturing trade deficit… $600 billion in 2014. How much manufacturing did that deficit displace?… About $360 billion…. 2 million jobs.
OK, what about the effect on overall employment?… If monetary and fiscal policy are used to achieve a target level of employment–as they generally were prior to the 2008 crisis–then a first cut at the impact on overall employment is zero. That is, trade deficits meant 2 million fewer manufacturing jobs and 2 million more in the service sector. Since 2008, of course, we’ve been in a liquidity trap, with the Fed either unable or unwilling to hit its targets and fiscal policy paralyzed by ideology, so trade deficits are in practice a major drag on overall employment…. So, how big a deal is displacement of 2 million manufacturing jobs? Not trivial…. But… absent the trade deficit… we would have roughly 11.5 percent of the work force in manufacturing, rather than the actual 10. Compare this with the realities of the past: more than 20 percent in manufacturing in the late 1970s, more than 25 percent in the 1960s….
Autor and various co-authors… do… a bottom-up approach…. The impact of the China shock on employment, wages, and so on at the regional level… beautiful work. But what they do next is to apply the implied coefficient from this analysis to the aggregate effects of the China shock. And that’s much more dubious–especially when, in the second paper, they purport to estimate the effects on overall employment. In general, you can’t do that: applying estimates of partial regional effects to the overall aggregate exposes you to huge possible fallacies of composition. And in this case the crucial issue is monetary and fiscal response. Up through 2007… [their results] should be seen as jobs shifted out of manufacturing to other sectors, not total job loss…
Must-Read: Nick Bunker: How the U.S. Housing Boom Hid Weaknesses in the Labor Market
Must-Read: But I cannot help but think that the argument of this paper is fundamentally wrong:
: How the U.S. Housing Boom Hid Weaknesses in the Labor Market: “The share of workers ages 25 to 54 with a job has been on an overall decline since 2000…
…This decline hit prime-age workers without a college degree particularly hard…. Kerwin Kofi Charles and Erik Hurst of the University of Chicago and Matthew Notowidigdo of Northwestern… detail the relationship between share of prime-age, non-college-educated men working in manufacturing, working in construction, and those not employed. The combined share of these three series seems to stay relatively constant at about 50 percent, with increases in construction employment offset by declines in manufacturing employment or declines in non-employment. So perhaps increased demand for construction workers during the housing bubble offset the declines in manufacturing employment. Looking at trends in employment across metropolitan areas in the United States, the three authors find evidence that the construction industry did end up hiring workers who left the manufacturing sector…. The results of this paper support the larger idea that declining employment and labor force participation among prime-age men is primarily a result of declining demand for the types of labor that many of them traditionally provided…
The first two figures in the paper show the share of non-college men with jobs holding roughly steady until 2000, and then declining:
And the number of manufacturing plus construction jobs staying roughly constant until 2000, and then declining:
Share. Number. Share. Number. The non-college male employment share held up perfectly well through 2000 in spite of the fact that the average non-college male had a smaller and smaller chance of landing a job in manufacturing-and-construction. “Declining demand of the types of labor… traditionally provided” has no effect on employment shares–until after 2000. I believe that declining demand had a big effect on the price of labor–on real wages. But I see no sign it had any effect on the chance of a non-college male getting a job.
And look at non-college women:
Lagging men by 12%-points in employment in 2000, but by 15%-points today.
I see no reason to think that there is a cross-gender cross-era thing in employment shares for shifts in economic structure that lead to a declining demand for labor in traditionally “male” sectors to explain. Slack demand and thus a broken labor market is a much better hypothesis to start with.
Must-read: Dean Baker: “The Elite’s Comforting Myth: We Had to Screw Rich Country Workers to Help the World’s Poor”
Must-Read: : The Elite’s Comforting Myth: We Had to Screw Rich Country Workers to Help the World’s Poor: “Roger Cohen gave us yet another example of touching hand-wringing from elite types…
…about the plight of the working class in rich countries…. Cohen acknowledges that there is a real basis for their rejection of the mainstream: they have seen decades of stagnating wages. However Cohen tells us the plus side of this story, we have seen huge improvements in living standards among the poor in the developing world. In Cohen’s story, the economic difficulties of these relatively privileged workers is justified by the enormous gains they allowed those who are truly poor. The only problem is that these workers are now looking to these extreme candidates. Cohen effectively calls for a more generous welfare state to head off this turn to extremism, saying that we may have to restrain ‘liberty’ (he means the market) in order to protect it. This is a touching and self-serving story. The idea is that elite types like Cohen were winners in the global economy. That’s just the way it. Cohen is smart and hard working, that’s why he and his friends did well. Their doing well also went along with the globalization process that produced enormous gains for the world’s poor. But now he recognizes the problems of the working class in rich countries, so he says he and his rich friends need to toss them some crumbs so they don’t become fascists.
We all should be glad that folks like Cohen support a stronger welfare state, but let’s consider his story… imagine that mainstream economics wasn’t a make it up as you go along discipline. The standard story in economics is that capital is supposed to flow from rich countries to poor countries…. Rich countries lend poor countries the capital they need to develop… [run] large trade surpluses with the developing world. In effect, the rich countries would be providing the capital that poor countries need to build up their capital stock and infrastructure, while still ensuring that their populations are fed, housed, and clothed. We actually were seeing a pattern of development largely along these lines in the early 1990s….
This pattern was reversed in 1997 with the U.S.-I.M.F.’s bailout from the East Asian financial crisis…. The countries directly affected began to run huge trade surpluses in order to accumulate massive amounts of reserves. Other developing countries also decided to go the same route in order to avoid ever being in the same situation as the countries of East Asia. From that point forward developing countries like China and Vietnam ran enormous trade surpluses. This implied huge trade deficits and unemployment for manufacturing workers in the United States and to a lesser extent Europe…. Cohen is giving us this impressive display of hand-wringing…. It’s very touching, but in the standard economics, it was hardly necessary. The standard economics would have allowed the pattern of growth of the early and mid-1990s to continue…. The fact that the textbook course of development was reversed, with massive capital flows going from poor countries to rich countries, was due to a massive failure of the international financial system…. The fact that manufacturing workers paid this price, and not doctors, lawyers, and other highly paid professionals, was by design….
It’s touching that folks like Roger Cohen feel bad for the losers from the process of globalization. But the story is that they didn’t just happen to lose, his friends designed the game that way.
Must-read: Martin Sandbu: “Manufacturing didn’t leave; it left workers behind”
Must-Read: : Manufacturing didn’t leave; it left workers behind: “America’s blue-collar aristocracy fell on hard times long ago…
…but its ghost remains influential in politics. That much is clear from Hillary Clinton’s vow to ‘bring manufacturing back’ and Donald Trump’s railing against the ‘mortal threat to American manufacturing’ (presumably any number of foreign countries with which the US trades, but in this case the target was the Trans-Pacific Partnership trade agreement). One problem with this rhetoric, politically potent though it may be, is that manufacturing has never left the US. As the chart below shows, manufacturing output has grown at a steady pace for decades, only temporarily thrown off course by recessions before returning to its previous trend. American factories today produce as much as they ever have.
Of course the number of jobs in manufacturing has fallen deeply — US manufacturing employment peaked in the 1970s — with particularly steep slides in the recessions of the 2000s. And this is what drives the rhetoric, and makes the Trans-Pacific Partnership a particularly delicate issue, in the current US political campaign. Mark Muro and Siddharth Kulkarni are quite right to refer to the blue line above as a one-chart explanation of why voters are angry. That’s understandable even though, as Jeffrey Rothfeder points out, job numbers in US manufacturing have been on a steady increase since 2010. However, the fact that output has kept going up while employment has sunk like a stone means that the political narrative of manufacturing activity ‘stolen’, or whisked away to other countries, doesn’t quite add up. What the numbers show is, by definition, that manufacturing has become more productive as well as increasing in total output. In other words, what has been happening — since the 1970s — is a productivity-boosting restructuring, not a shrinkage…
Must-read: Justin Fox: “About That U.S. Manufacturing Renaissance…”
Must-Read: : About That U.S. Manufacturing Renaissance…: “After a brutal period of downsizing and reorganizing…
…the U.S. manufacturing sector has become the most competitive in the world. Output per worker is higher than in any other major manufacturing country. Labor costs per unit of output are lower than in Brazil, Canada and Germany, and only slightly higher than in China. What’s more, writes Gregory Daco of Oxford Economics in the new report from which the above facts are taken, ‘the U.S. is ‘gifted’ with a stable regulatory framework, a flexible labor market, low energy costs and access to a large domestic market.’
So that’s great! Time for a manufacturing renaissance, right?… But… there are few signs of it actually happening yet. Yes, there are the almost 900,000 manufacturing jobs added in the U.S. since early 2010. But it’s important to see that for what it is–a modest rebound after a spectacular collapse…. Why isn’t reshoring taking off? Daco, of Oxford Economics, stressed that such shifts don’t happen overnight. ‘It takes quite a bit of time for a company to modify its supply chain,’ he said in a phone conversation. He also noted that ‘nearshoring’ to Mexico, where unit labor costs are still substantially lower than in the U.S., remains popular….
The countries of South and Southeast Asia… have labor forces that run into the hundreds of millions of workers, so the gradual shift of certain industries to other Asian low-cost countries is likely to continue…. Clothing- and furniture-making, for example, are unlikely to return to the U.S. in a big way. But in capital-goods manufacturing, labor costs matter less than technology and the existence of a local ecosystem of suppliers, consultants and skilled workers that can take a while to put together. In their rush to offshore, then, U.S. manufacturers may have permanently destroyed their ability to make certain products here. As Gary P. Pisano and Willy C. Shih wrote in a 2009 Harvard Business Review article:
In making their decisions to outsource, executives were heeding the advice du jour of business gurus and Wall Street: Focus on your core competencies, off-load your low-value-added activities, and redeploy the savings to innovation, the true source of your competitive advantage. But in reality, the outsourcing has not stopped with low-value tasks like simple assembly or circuit-board stuffing. Sophisticated engineering and manufacturing capabilities that underpin innovation in a wide range of products have been rapidly leaving too. As a result, the U.S. has lost or is in the process of losing the knowledge, skilled people, and supplier infrastructure needed to manufacture many of the cutting-edge products it invented.
This loss of capability could be what we’re seeing evidence of in the trade data. If so, a true U.S. manufacturing renaissance may be a long time coming.
Albert Hirschman’s linkages, economic growth, and convergence yet again…
When you think about it, broadly speaking, the question of why we have seen such huge rises in the real wages of labor–of bare, unskilled labor not boosted by expensive and lengthy investments in upgrading what it can do–is somewhat puzzling.
We can see why overall productivity-per-worker has increased. We have piled up more and more machines to work with per worker, more and more structures to work in per worker, and develop more and more intellectual blueprints for how to do things. But why should any of these accumulated factors of production be strong complements for simple human labor?
Karl Marx thought that they would not: he thought that what more accumulation of capital would do would be to raise average production-per-worker while also putting strong downward pressure on the wages and incomes of labor, enriching only those with property. Yet the long sweep of history since the early 18th century invention of the steam engine sees the most extraordinary rise in the wages of simple, unskilled labor.
There are, again broadly speaking, two suggested answers:
The first is that the accumulated intellectual property of humanity since the invention of language is a highly productive resource. Nobody can claim an income from it by virtue of ownership. Therefore that part of productivity due to this key factor of production is shared out among all the other factors. And, via supply and demand, a large chunk of that is shared to labor.
The second is that there is indeed a property of the unskilled human that makes its labor a very strong complement with other factors of production. That property is this: our machines are dumb, while we are smart. Human brain fits in a breadbox, draws 50 W of power, and is an essential cybernetic control mechanism for practically everything we wish to have done, to organize, or even to keep track of. The strong and essential complementarity of our dumb machines and our smart brains is the circumstance that has driven a huge increase in labor productivity in manufacturing. And, by supply and demand, that increase has then been distributed to labor at large.
Both have surely been at work together.
But to the extent that the second has carried the load, the rise of the robots—the decline in the share of and indeed the need for human labor in manufacturing—poses grave economic problems for the future of humanity, and poses them most immediately for emerging market economies.
So let me give the mic to smart young whippersnapper Noah Smith, playing variations on a theme by Dani Rodrik:
: Will the World Ever Boom Again?: “Let’s step back and take a look at global economic development…
…Since the Industrial Revolution… Europe, North America and East Asia raced ahead… maintained their lead… confound[ing] the predictions of… converg[ance]. Only since the 1980s has the rest of the world been catching up…. But can it last? The main engine of global growth since 2000 has been the rapid industrialization of China… the most stupendous modernization in history, moving hundreds of millions of farmers from rural areas to cities. That in turn powered the growth of resource-exporting countries such as Brazil, Russia and many developing nations that sold their oil, metals and other resources to the new workshop of the world. The problem is that China’s recent slowdown from 10 percent annual growth to about 7 percent is only the beginning….
But… what if China is the last country to follow the tried-and-true path of industrialization? There is really only one time-tested way for a country to get rich. It moves farmers to factories and import foreign manufacturing technology… the so-called dual-sector model of economic development pioneered by economist W. Arthur Lewis. So far, no country has reached high levels of income by moving farmers to service jobs en masse…. Poor nations are very good at copying manufacturing technologies from rich countries. But [not] in services…. Manufacturing technologies are embodied in the products themselves and in the machines… used to make the products…. Manufacturing is shrinking… all across the globe, even in China… a victim of its own success…. If manufacturing becomes a niche activity, the world’s poor countries could be in trouble…
By “a niche activity” I read “does not employ a lot of workers”–the value added of manufacturing is likely to still be very high and growing, certainly in real terms, just as the value of agricultural production is very high and growing today. But little of that value flows to unskilled labor. Rather, it flows to capital, engineering, design, and branding.
Noah’s points about economic development are, I think, completely correct.
The point is, however, one of very long standing. The mandarins of 18th-century Augustine Age Whitehall had a plan for the colony that was to become the United States. They were to focus on their current comparative advantages: produce, I’m slave plantations and elsewhere, the natural Reese source intensive primary products that the first British Empire wanted in exchange for the manufactured goods and transportation services the first British Empire provided that made it so relatively ridge for its time.
Alexander Hamilton had a very different idea. Hamilton believed very strongly that the US government needed to focus on building up manufacturing, channels through which savings be invested in industry, and exports different from those of America’s resource-based comparative advantage. The consequence would be the creation of engineering communities of technological competence which would then spread knowledge of how to be productive throughout the country. Ever since, every country that has successfully followed the Hamiltonian path–that is kept its manufacturing- and export-subsidization policies focused on boosting those firms that do actually succeed in making products foreigners are willing to buy and not havens for rent-seekers–have succeeded first in escaping poverty and second in escaping the middle-income trap.
The worry is the China will turn out to be the last economy able to take this road–that after China manufacturing will be simply too small and require too little labor as computers substitute for brains as cybernetic control mechanisms to be an engine of economy-wide growth. And the fear is that a country like India that tries to take the services-export route will find that competence in service exports does not more than competence in natural-resource exports to produce the engineering communities of technological competence which generate the economy-wide spillovers needed for modern economic growth that achieves the world technological and productivity frontier.
Very interesting times. Very interesting puzzles.