Friday, September 4, 2015

What Factor Has Prolonged America's Unemployment Problem?

An interesting economic snapshot by Will Kimball and Susan Balding at the Economic Policy Institute provides us with a sense of the strong connection between the U.S. trade deficit and the gutting of America's manufacturing sector, a connection that has prolonged America's real unemployment problem.

Here is a graph showing how the international trade deficit has blossomed since 1997:

From a low of $130.6 billion in 1997, the United States trade deficit with the rest of the world grew to a peak of $558.5 billion in 2006, a 327 percent increase.  In 2014, the trade deficit was $514.6 billion, the fourth highest level on record.

Here is a graph showing how the number of U.S. workers employed in manufacturing has dropped since 1997:

At its peak in 1998, 17.56 million American workers were employed in the manufacturing sector.  This dropped to a low of 11.528 million in 2010, a drop of 6.032 million workers or a loss of 34.4 percent.

Prior to the 2000 - 2001 recession, the manufacturing sector has typically regained most, if not all, of the jobs lost during a recession as shown on this graph which shows both the number of unemployed Americans and the number of Americans employed in the manufacturing sector:

As you can see, from 1950 to 2000, the number of Americans employed in the manufacturing sector remained between 13 million in 1950 and 19.5 million in 1979.     

Things changed substantially around the turn of the new millennium when the number of manufacturing workers began to decline as you noted on the graph above.  This is particularly the case since the Great Recession.  On this graph, you will notice that, even though the number of unemployed Americans has decreased substantially since the end of the Great Recession, the number of Americans employed in the manufacturing sector has barely budged:

The number of Americans employed in the manufacturing sector hit a 60 year low of 11.4 million in early 2010 and has risen to only 12.35 million in mid-2015, an increase of less than 1 million manufacturing jobs.

The rising trade deficit and dropping manufacturing employment shows that United States manufacturers are losing jobs to manufacturing industries in other nations, particularly China.  For example, here is a graph showing the net trade value in goods with China since 1992:

When China entered the World Trade Organization in December 2001, it was touted by U.S. politicians as a game-changing deal for the American economy as shown in this speech given on March 8, 2000 by then-President Bill Clinton:

"Last fall, as all of you know, the United States signed the agreement to bring China into the W.T.O. on terms that will open its market to American products and investments.

When China concludes similar agreements with other countries, it will join the W.T.O. But, as Lee said, for us to benefit from that, we must first grant it permanent normal trading status, the same arrangement we have given to other countries in the W.T.O. Before coming here today, I submitted legislation to Congress to do that, and I again publicly urge Congress to approve it as soon as possible.

Again, I want to emphasize what has already been said. Congress will not be voting on whether China will join the W.T.O. Congress can only decide whether the United States will share in the economic benefits of China joining the W.T.O. A vote against P.N.T.R. (Permanent Normal Trade Relations) will cost America jobs as our competitors in Europe, Asia and elsewhere capture Chinese markets that we otherwise would have served." (my bold)

That said, in the first ten years after joining the WTO, China has accomplished the following:

- it is the world's second-largest economy in GDP terms.
- it is the world's largest merchandise exporter.
- it is the world's fourth largest commercial services exporter.

This is what happened to China's GDP and GDP per capita between 2001 and 2010:

This is what happened to China's manufacturing industry between 2001 and 2011:

One last question in closing this posting.  Wouldn't America's ongoing real problem with high unemployment (not the headline unemployment statistic touted by the Bureau of Labor Statistics) be quite easily solved if America was still a manufacturing stronghold?  Unfortunately, recent moves by China that allowed its currency to devalue during the recent economic "near-miss" to make China's exports less expensive and imports less attractive to consumers , it is highly unlikely that there will be any meaningful change in the number of Americans employed in the manufacturing sector any time soon.


  1. Great piece, we can not underestimate the importance of China, it has brought a huge and rapid shift in world trade. Much of the growth in China after 2008 came from a massive 6.6 trillion dollar stimulus program that expanded credit and poured massive amounts of money into the system. This money encouraged expansion and construction with little regard as to real demand or need. Every country has unofficial lenders, but in China individuals, companies and even local governments who can not get loans from state-controlled banks have been on a borrowing binge from these unofficial sources.

    These "shadow banks" have grown massive over the last several years as the Chinese have borrowed like crazy. According to some estimates, China’s banking system has grown from $10 trillion to $24 trillion since 2008. Now the reverse may happen, if the yuan weakens, the central bank will effectively have to buy its own currency using foreign reserves to maintain its peg. More about China's credit trap in the article below.

  2. The US has 2 workforces that compete, unfairly. The one in the US (regulation+, costs relatively high) and the one in China (regulation nil, costs low). Those who produce for the US goods and services that can't fit in a container or go down an optic fibre i.e can't be imported or outsourced, don't have this competition and do very well. The other 80% are adrift, and getting poorer and poorer, but till lately, were maintaining their lifestyle with increasing debt - which a cancerous financial sector was happy to supply. They've been owing more and more of their "soul to the company store".

    The status quo cannot sustain. Free trade has been great for the US rich but a tragedy for the 80%, and the country. Barriers required. One of the first should be to restrian capital flows. The ability of capital to hurtle around the globe unrestrained makes it dangerous. it also gives it a grossly unfair advantage over labour and sovereigns - and inevitably it's abusing that advantage.