Thursday, April 27, 2017

What's Behind the Collapse of America's Manufacturing Sector?

As we are all aware, Donald Trump is on a mission to bring jobs back to the United States.  In large part, his plans include renegotiating trade deals that have led to job losses in what was once America's economic foundation; manufacturing.

Here is a graph showing what has happened to manufacturing jobs in the United States since 1939:

At 12.392 million jobs, America's manufacturers have shed 7.161 million jobs from the peak of 19.553 million in June 1979, a decline of 36.6 percent.  As well, since March 2010 when manufacturing jobs hit their post-Great Recession nadir of 11.453 million, the addition of 939,000 jobs is a very poor showing, particularly given the lengths that the Federal Reserve has gone to since 2008.

While there is no doubt that freer trade has led to offshoring of American manufacturing jobs, a study entitled "The Myth and the Reality of Manufacturing in America" by Michael Hicks and Srikant Devaraj at Ball State University strongly suggests that other factors are at play as you will see in this posting.

Let's start with a graphic that shows the U.S. manufacturing production index from 1919 to 2014:

As you can see, the Great Recession put significant downward pressure on national manufacturing production, pushing it well below the trend line.  Nonetheless, in real dollars (inflation adjusted), the value of manufacturing production continues to climb and, by 2014, it had recovered completely from the setback of the Great Recession. 

Here is a graphic showing the value of all manufacturing as well as nondurable goods (those used for less than a year) and durable goods (those used for more than a year) from 1987 to 2014:

While the real value of nondurable goods (in light blue) has been static for more than a decade, the real value of nondurable goods (in dark blue) continues to rise.  As well, you can see that the real value of all manufacturing goods continued to climb throughout the two and a half decades with short interruptions during recessions.  This clearly shows us that manufacturing is still a very important part of the U.S. economy.  In fact, while the total value of manufactured goods fell by 11.5 percent during the period from 2006 to 2009, rose by 32.9 percent over the period from 2009 to 2013, leaving us with overall growth of 17.6 percent from 2006 to 2013.

Now, let's look at how productivity has changed in key manufacturing sectors.  Here is a table showing how the average product of labor changed between 1998 and 2012 and the GDP growth for each sector over the same timeframe:

As you can see, when adjusted for inflation, productivity grew for all sectors over the period from 1998 to 2012, ranging from a low of 6 percent in the nonmetallic mineral products sector to a high of 829 percent in the computer and electronic products sector with an average of 90 percent for all manufacturing sectors.  This compares to overall production value increase (i.e. GDP growth) of 32 percent for all sectors.

What caused this substantial increase in productivity?  The authors note that the increase in productivity is largely related to the adoption of automation and information technology.  The authors focused on the period from 2000 to 2010 when the U.S. economy experienced the largest decline in manufacturing employment in history as shown here:

In January 2000, there were 17.284 million manufacturing jobs in the United States, by the beginning of 2010, this had dropped to 11.46 million, a decline of 5.824 million.  The authors  calculated the total number of employees needed to produce the 2010 levels of production using the 2000-level worker productivity levels.  Had the economy kept the level of productivity from the year 2000 and applied that to the 2010 production levels, manufacturers would have required 20.9 million workers rather than the 12.1 million that were employed in the sector

The study then examines the job losses in manufacturing that are attributable to trade, changes in domestic demand for goods and changes to productivity.  The authors found that losses in productivity and trade varied by sector but, overall, the share of job losses in manufacturing were relatively small when it came to international trade (13.4 percent of jobs lost) compared to losses related to increases in productivity (87.8 percent of jobs lost).  This means that only 750,000 of the jobs lost in manufacturing during the period between 2000 and 2010 were related to international trade compared to job losses of over 5 million that were related to increased productivity (i.e. the adoption of automation and information technology). 

From what we can see in this study, very little of the job losses in the manufacturing sector are related to international trade.  It appears that, unless America's domestic manufacturers are willing to forgo the productivity gains made by adopting automation, the U.S. economy will find it increasingly difficult to create significant numbers of manufacturing jobs.  Gone are the glory days of the factory worker no matter what Donald Trump may want. 

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