Thursday, July 3, 2014

The Root Cause of America's Stubborn Unemployment Problem

I have written on the subject of job losses in the American manufacturing sector on many occasions.  The apparently permanent loss of millions of jobs in what used to be one of America's strongest sectors, in large part, the sector that made America into a global economic powerhouse, has made it very difficult for the economy to recover at normal post-recessional rates since the end of the Great Recession.

Here is a graph showing the gutting of America's manufacturing sector:

Since November 2000 when there were 17.203 million workers employed in manufacturing, the number of workers has dropped to 12.099 million, just off its low of 11.453 million in February 2010.  Over the nearly 14 year period, 30 percent of American manufacturing jobs vanished into thin air.  

What has caused this and why did it seem to occur right around the beginning of the new millennium?  A paper by Robert E. Scott at the Economic Policy Institute provides us with some insight.  The author suggests that the increase in the U.S. trade deficit with China is largely to blame.  Here is a graph showing the growing U.S. - China trade deficit since the beginning of the 2000s:

Since 2001, the U.S. - China trade deficit has grown by an average of 13.6 percent annually.  This all began in December 2001 when China entered the World Trade Organization and protected its economy against its trading partners, particularly the United States.  While there was great excitement at the time, once again, we have a prime example of unintended consequences, at least on the part of the United States.

Mr. Scott calculates that the following has happened:

1.) In 2011, 97.8 percent of United States imports from China were manufactured goods. 

2.) Between 2001 and 2011, the U.S. trade deficit with China eliminated 2.742 million jobs with 2.1 million of those being in the manufacturing sector.  On average, 274,200 jobs have been lost every year since China entered the WTO.

3.) Of the jobs eliminated, 35 percent or 958,800 jobs were jobs that paid well and had excellent benefits.

4.) Even when re-employed in industries that do not involve the trading of goods, the 2.7 million displaced workers saw net wage losses of $13,505 per worker in 2011.  In total, all displaced workers had net wage losses of $37 billion per year.

5.) While we tend to associate manufacturing jobs with lower levels of education, in fact, scientists and engineers make up 7.8 percent of workers in the manufacturing sector, more than twice the level of 3.3 percent in the rest of the economy as shown on this table:

This means that it is not just lesser educated Americans in the manufacturing sector that are finding themselves displaced from their jobs through trade with China.

Interestingly, when we look more closely at the data, we find that during the period between 2008 and 2011 (during and just after the Great Recession), the United States trade deficit with China increased by $31.2 billion or 11.6 percent.  Over that same time frame, the number of jobs displaced increased by a whopping 21.7 percent, nearly twice the growth rate as the trade deficit.  A total of 662,100 jobs were lost between 2008 and 2011 either by the elimination of existing jobs or by preventing the creation of new jobs.  During the Great Recession, China took advantage of its position to manipulate its currency and used other unfair trade policies which undermined job creation in the United States, adding to the employment crisis.

Now, let's look at which geographic areas in the United States manufacturing sector have been the most impacted by trade with China.  Fortunately, the American Manufacturing website provides us with some compelling data that shows a state-by-state breakdown of the percentage of manufacturing jobs that have been lost due to trade with China noting that the darker the red, the higher the percentage of manufacturing jobs lost:

Here are the states that saw their manufacturing employment shrink by the greatest percentage between 2001 and 2010:

New Hampshire - 2.95 percent
California - 2.87 percent
Massachusetts - 2.86 percent
Oregon - 2.85 percent
North Carolina - 2.67 percent
Minnesota - 2.66 percent
Idaho - 2.65 percent
Colorado - 2.38 percent
Texas - 2.26 percent

The Economic Policy Institute found that ending currency manipulation, a practice long used by China that pushes up the price of anything they import and makes it cheaper for us to buy their exported goods, could allow the United States economy to create between 2.3 and 5.8 million new jobs and significantly reduce the annual trade deficit by between $200 billion and $500 billion annually by 2015.  

While many executives in American industry lauded the entry of China into the WTO in 2001 because they anticipated access for their products to hundreds of millions of Chinese consumers, in fact, the entry of China has brought a series of painful and unintended consequences to the U.S. economy.  In large part, the growing trade deficit with China has created a catastrophe in America's manufacturing sector and made the post-Great Recession "recovery" seem like not much of a recovery at all, particularly for millions of unemployed Americans.


  1. Would it have been possible to prevent or delay China's entry into the WTO? Are there more requirements that should have been put on China? If you have any knowledge, please share.

    By the way. The final sentence is a repetition of the first sentence in the last paragraph. C/P error.

    1. Thanks MP (for the correction).

      I think that greed got the better of the thinkers that promoted China into the WTO.

      If you are interested, go to the WTO page on international disputes and you'll get a sense of what "open trade" isn't. The signatories to the WTO must spend most of their time trying to settle trade disputes between them.

  2. It is not rational to think that increased trade creates a lot more jobs. While it expands ones market the area where the goods are shipped does not enjoy the creation of jobs for making that product. In many ways the loss of manufacturing jobs in America is proof that trade is not our salvation. More on this subject in the article below.