The Great Jobs Switch: Why the Loss of Manufacturing Jobs is Good for America.

The Economist ^ | 9/29/2005 | Economist Magazine Editorial

[SirLinksalot]

The Great jobs switch

Sep 29th 2005

The fall in manufacturing employment in developed economies is a sign of economic progress, not decline

THAT employment in manufacturing, once the engine of growth, is in a long, slow decline in the rich world is a familiar notion. That it is on its way to being virtually wiped out is not. Yet calculations by The Economist suggest that manufacturing now accounts for less than 10% of total jobs in America. Other rich countries are moving in that direction, too, with Britain close behind America, followed by France and Japan, with Germany and Italy lagging behind (see article).

Shrinking employment in any sector sounds like bad news. It isn't. Manufacturing jobs disappear because economies are healthy, not sick.

The decline of manufacturing in rich countries is a more complex story than the piles of Chinese-made goods in shops suggest. Manufacturing output continues to expand in most developed countries—in America, by almost 4% a year on average since 1991. Despite the rise in Chinese exports, America is still the world's biggest manufacturer, producing about twice as much, measured by value, as China.

The continued growth in manufacturing output shows that the fall in jobs has not been caused by mass substitution of Chinese goods for locally made ones. It has happened because rich-world companies have replaced workers with new technology to boost productivity and shifted production from labour-intensive products such as textiles to higher-tech, higher value-added, sectors such as pharmaceuticals. Within firms, low-skilled jobs have moved offshore. Higher-value R&D, design and marketing have stayed at home.

All that is good. Faster productivity growth means higher average incomes. Low rates of unemployment in the countries which have shifted furthest away from manufacturing suggest that most laid-off workers have found new jobs. And consumers have benefited from cheap Chinese imports.

Yet there is a residual belief that making things you can drop on your toe is superior to working in accounting or hairdressing. Manufacturing jobs, it is often said, are better than the Mcjobs typical in the service sector. Yet working conditions in services are often pleasanter and safer than on an assembly line, and average wages in the fastest-growing sectors, such as finance, professional and business services, education and health, are higher than in manufacturing.

A second worry is that services are harder to export, so if developed economies make fewer goods, how will they pay for imports? But rich countries already increasingly pay their way in the world by exporting services. America has a huge trade deficit not because it is not exporting enough, but because American consumers are spending too much.

A new concern is that it is no longer just dirty blue-collar jobs that are being sucked offshore. Poor countries now have easier access to first-world technology. Combined with low wages, it is argued, they can make everything—including high-tech goods—more cheaply. But that's only partly true. China's comparative advantage is in labour-intensive industries; and a basic principle of economics, proven time and again, is that even if a country can make everything more cheaply, it will still gain from specialising in goods in which it has a comparative advantage. Developed economies' comparative advantage is in knowledge-intensive activities, because they have so much skilled labour. For years to come, China will be more likely to assemble the best computers than to design them.

Employment in rich countries will have to shift towards higher skilled jobs to maintain economic growth. Countries that prevent this shift taking place risk being left behind. Rather than block it, governments need to try to ameliorate the pains which change inflicts by, for example, retraining or temporarily helping those workers who lose their jobs.

People always resist change, yet sustained growth relies on a continuous shift in resources to more efficient use. In 1820, for example, 70% of American workers were in agriculture; today 2% are. If all those workers had remained tilling the land, America would now be a lot poorer

[Logophile]

Pure bullcrap. There are only 3 fundamental ways to create wealth. (not money) Mining/oil drilling, Agriculture/logging/fishing, Manufacturing. All the rest is merely paper snuffling or shuffling paper banknotes from one pocket to another.

I suppose it depends on what you mean by "Manufacturing."

You mentioned oil drilling as one of the fundamental ways to create wealth. What about refining the oil?

[Logophile]

Manufacturing is the taking of substances mined, drilled, harvested, etc from the earth; processing them by refining, smelting, molding, forming, machining etc and fashioning them into finished goods for the marketplace.

I see that you already answered my question.

So let me ask another: Is wealth created by the engineers who design the refinery?

[Maceman]

This trend will continue to grow. There are too many aging baby boomers, and a shortage of younger workers.

[Alberta's Child]

If you talk to anyone who has done business in China, they'll tell you that China is a long way from competing with modern Western countries in most respects. Their underlying business culture is so backward that they don't even have some of the most rudimentary things that are needed for a sound business climate.

[riverdawg]

"There are only 3 fundamental ways to create wealth. (not money) Mining/oil drilling. Agricultural/logging/fishing, Manufacturing."

And Hong Kong does which of these? Mercantilist fallacies die hard ...

[GSlob]

Possibility of wealth -"WOULD be rolling in wealth" - does not equal the actuality of it. Singapore does not produce much besides valuable services, but it IS a wealthy place. There is a book by Richard Lynn and Tatu Vanhanen "IQ and the wealth of nations" - you might wish to read it. Hint: according to them, the avg. IQ in India is 81 while in Singapore it is either 103 or around it [I do not remember the precise number]. Hence the difference.

[BnBlFlag]

This idea is insane. We won WWII because we outproduced the enemy. Were it not for our manufacturing capabilities the Germans would have won WWII.
Not to mention that these jobs provided a middle class lifestyle for millions of people.

[lilylangtree]

Why it's good for US to lose its manufacturing section is asinine and ridiculous--sounds like liberal leftist environmentalists wrote the report. Why don't these jerks explain it to the unemployed workers why they can't have their jobs back and why the unemployed can't feed their families? The jerks wouldn't live long enough to spit out their stupid reasoning.

[daviddennis]

Donald, I thought we still had Boeing, General Dynamics and plenty of other defense contractors still making stuff for the DoD.

Sir, this activity is mainly in companies that have complex legacy systems such as mainframes. They are starting to realize the value of their old mainframe programmers, because they are the only folks who have anything like full knowledge of these ancient systems. So there are now incentives being created to keep these people around.

Personally, I'm thinking of moving to a low-cost country so I can pursue my enterpeneurial dreams here. If I can live lavishly on $20k a year, as is possible in places like the Philippines, it should be possible for me to build a web-based system that can still get me US-style money. It's a lot easier to be successful if your desired luxury lifestyle (home on the beach, DSL Internet, fancy food, etc) costs $20k instead of $200k, and you can hire educated workers for $4 a day instead of $100+.

I'm mulling over doing exactly that. We'll see how I do.

D

[SirLinksalot]

<<<<
If you talk to anyone who has done business in China, they'll tell you that China is a long way from competing with modern Western countries in most respects. Their underlying business culture is so backward that they don't even have some of the most rudimentary things that are needed for a sound business climate.
>>>>>

China reminds me of what happened to Japan in the late 1980's. Back then everyone was predicting that Japan would overtake the USA as the premier world economy. Japan's banks were the biggest in the world, Japanese cars overtook ours, the Yen shot up from $1 to 250 to $1 to 100, and their chip industry was so competitive that the USA had to literally beg the government to FORM an industry consortium called SEMATEC to counter the Japanese Semiconductor invasion.

Back then, everyone was clamoring Reagan to follow the Japanese model --- They had MITI, which essentially helped to pick and choose which industry to support with tax dollars. One of the project was the 5th Generation project to create a supersmart supercomputer that understands artificial intelligence. Stanford Professor, Feigenbaum predicted the demise of American technological supremacy.

The last straw was when the Japs bought an American Icon -- the ROCKFELLER CENTER in New York.

What people did not realize was that Japanese Banks were loaning left and right like crazy without considering the underlying feasibility of businesses they were loaning to. The Japs were buying up real estate all over the world like crazy.

Come 1990 and the party ended. The Nikkei crashed from an index of 39000 to 13000 today and has not recovered for 15 years. Japan has been mired in a deflationary recession for over a decade, they had to sell their properties at a loss ( Rockfeller bought back his center for half what he sold it for ), the 5th generation project went nowhere, and the US is still the dominant computer standard maker of the world. As for the US government sponsored SEMATEC consortium to counter the Japs, hey --- IT WENT NOWHERE AND FOLDED LIKE A CHEAP CAMERA.

Why am I reminding everyone of history ? Simple --- REALIZE THIS --- CHINA IS STILL A SOCIALISTIC COUNTRY WITH AN AUTHORITARIAN GOVERNMENT THAT OWNS THEIR BIGGEST BANKS and SUBSIDIZES THEIR BIGGEST INDUSTRIES, OFTEN DOLING OUT FAVORS TO CRONIES AND FRIENDS. NEPOTISM IS RAMPANT.

OVER 45% OF THEIR BANK LOANS ARE NON-PERFORMING, and a day of reckoning will have to come !

Unless China gets her financial act together, history will repeat itself.

"He who does not learn from history is condemned to repeat it" -- George Santayana

[Tallguy]

A customer of mine makes electrical connectors for computers and other types of consumer products. They would develop a new-style connector then tool-up to stamp the contacts & mold the plastic housings. As the demand for the new connector 'ramped-up' they would invest a million dollars or more in high-tech automation to stuff the contacts into the housings thereby saving labor. No more. Now they never get that far. As soon as demand rises they make some down & dirty hand-assembly tools & ship the process line off to China (previously Mexico).

Bottom line: American Automation Engineering can still lose to dirt-cheap labor.

[Alberta's Child]

Were it not for our manufacturing capabilities the Germans would have won WWII.

That had less to do with our manufacturing capabilities than with the fact that the Atlantic Ocean separated us from Europe. Our manufacturing capabilities weren't necessarily greater than Germany's -- we just didn't have to worry about our factories having bombs dropped on them every other night.

The age of the ICBM pretty much made that "advantage of geographic separation" pointless. In fact, it's kind of neat how an enemy of the United States today would have to drop bombs on China, Indonesia, and Malaysia in order to hamper our manufacturing capabilities.

[SirLinksalot]

<<<<
Hint: according to them, the avg. IQ in India is 81 while in Singapore it is either 103 or around it [I do not remember the precise number]. Hence the difference.
>>>>>

Remember this -- India has close to Billion people. Even if half of them are uneducated and say 30% have low IQs ( that drags the average down to the 80's ), you still have 500 million people ( more than the whole of the USA) whose IQs are collectively equal to that of ours.

Singapore, we need not worry about. Their salaries are too high to even consider manufacturing or even outsourcing there anymore.

If India reached the salary level of Singapore, heck, we wouldn't even consider outsourcing to them. it would be too expensive.

[aspiring.hillbilly]

It is implied in manufacturing that methods, tooling, and processes have to be devised to facilitate the process from materials to finished goods. I didn't say that merely line manufacturing jobs create wealth, the entire act of manufacturing creates wealth. This is a profound view of a nations economy that our leaders have lost sight of, not a simplistic view.

As things stand now, we could not manufacture an equivalent amount of war material that was manufactured in WWII, with twice the population. Should a world war on a similar scale occur, we would be SOL.
We cannot even keep a few hundred thousand troops in the middle east adequately supplied right now...

[aspiring.hillbilly]

Refining is processing and manufactures gasoline and road tar, etc. yeah your on to something.....LOL

[Alberta's Child]

Good post.

Reminds me of a story from the Winter Olympics back in 1992, when Japan's Midori Ito was favored to win the gold medal in womens' figure skating. One of the American television commentators asked a fellow commentator if he thought Ito would win the gold, thereby contributing to Japan's continued rise against the U.S. in many areas of life.

"No," said the other guy, "I think Japan will never dominate the U.S. because our Japanese will always be better than their Japanese."

Japanese-American Kristi Yamaguchi won the gold medal.

[RobFromGa]

Summary

The manufacturing sector of the U.S. economy has experienced substantial job losses over the past several years. In January 2004, the number of such jobs stood at 14.3 million, down by 3.0 million jobs, or 17.5 percent, since July 2000 and about 5.2 million since the historical peak in 1979. Employment in manufacturing was its lowest since July 1950 (see Figure 1).

Figure 1.

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Manufacturing Employment

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(Millions of jobs)

Sources: Congressional Budget Office; Department of Labor, Bureau of Labor Statistics.

Note: The vertical bars indicate periods of recession as defined by the National Bureau of Economic Research.

---

Much of the decline in manufacturing employment since 2000 reflects the recession that began in 2001 and the relatively weak recovery in demand that followed. The recession was particularly hard on the manufacturing sector, as the demand for goods weakened in both the United States and the rest of the world. Those cyclical losses in manufacturing employment persisted through the first two years of the recovery, but they are likely to be at least partially reversed as the economy expands in the next few years.

However, long-term trends indicate that even after the economy has fully recovered from the 2001 recession, employment in manufacturing is unlikely to return to its prerecession level. Over the long term, productivity in manufacturing has increased at a consistently strong pace, so sales would have needed to expand even faster for employment to show any gains. But the growth in demand for manufactured goods has not kept pace with the growth in productivity, as consumers continue to devote more of their spending to services instead of goods. In addition, U.S. manufacturers have faced competition from countries where businesses face lower compensation costs. Finally, the downward trend is in part a statistical artifact: manufacturers are increasingly using contract and temporary labor, which provides jobs that, in the past, would have shown up in the statistics as manufacturing employment but now do not.

The loss of manufacturing jobs is a burden for affected workers but should not have a lasting effect on employment in the economy as a whole. The labor market in the United States is quite flexible, so even if gains in productivity, shifts in demand, or increasing international competition bring about permanent job losses in manufacturing, the effect on aggregate employment is not permanent, lasting only through a period of adjustment during which displaced workers obtain other employment (albeit in many cases in less desirable jobs).
 

The Recession of 2001 and Its Aftermath

The manufacturing sector has experienced a severe downturn and only a modest recovery to date. The loss of jobs in the recent recession and recovery has been significantly worse than in a typical recession. Instead, the extent of the losses has been comparable to that during the more severe back-to-back recessions in 1980 and in 1981 and 1982. Since 2000, more than half of the losses have occurred in five industries: those producing computer and electronic products, transportation equipment, machinery, fabricated metals, and apparel. But in all 21 industries that constitute the manufacturing sector,⁽¹⁾ employment has declined, and 17 of the 21 have seen losses exceeding 10 percent. In fact, all 21 industries have shown declines even since the recession's end in November 2001.

The drop in manufacturing employment since the beginning of the recession largely reflects the weak demand for capital goods in the United States and for both capital and consumer goods among its major trading partners. In the United States, the demand for machinery and other capital equipment slumped after the investment surge of the late 1990s and was only beginning to recover in 2003. The resulting loss in production in industries producing capital goods severely reduced employment in the sector. Meanwhile, tepid growth overseas and a high U.S. real exchange rate meant weak demand for U.S. goods among the nation's major trading partners. Consequently, U.S. exports have been weaker during the 2001 recession and the recovery thus far than during and after most previous recessions, while imports have grown about as fast as they typically have after previous recessions (see Figure 2).

Figure 2.

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U.S. Exports and Imports of Goods

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(Percentage difference from peak value)

Sources: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis.

Note: The peak of the last business cycle occurred in March 2001, as designated by the National Bureau of Economic Research.

a. Average of the seven recoveries during the 1949-1990 period, excluding the recovery in 1980 from the recession that year because that recovery was so short-lived.

---

 

Long-Term Influences

A number of long-term factors have influenced U.S. manufacturing employment, including these:

Shift in Demand Away from Manufactured Goods

The share of consumer spending devoted to manufactured goods has declined over time both in the United States and in other industrialized nations. As consumers' income has risen, they have increased their purchases of goods but boosted their spending on services--including medical care, notably--even more. In 2000, 42 percent of U.S. consumer spending was devoted to goods, down from 53 percent in 1979 and 67 percent in 1950. Likely factors contributing to that shift are an increase in the value of time resulting from rising real (inflation-adjusted) wages and married women's increased participation in the labor force, which has led households to substitute some purchased services for tasks formerly performed in the home.

Manufacturing Productivity

Over recent decades, U.S. manufacturers have continually invested in more and better capital goods and manufacturing techniques in order to remain competitive in world markets. That investment has enabled them to raise their output and keep pace with overall economic growth without a corresponding increase in the number of workers that they employ. Since 1979, the productivity of manufacturing workers has grown at an average annual rate of 3.3 percent, significantly faster than the 2.0 percent growth of labor productivity in the nonfarm business sector overall.⁽²⁾

Improvements in productivity are economically beneficial, as they permit greater profits, higher real wages, and lower prices. But while the prices of manufactured goods have indeed fallen consistently relative to other prices, those lower prices have not led to increased sales: the share of gross domestic product (GDP) accounted for by manufacturing output has been roughly constant over the past half-century (see Figure 3). Strong growth in productivity and a slower rate of growth in the demand for manufactured goods have necessarily entailed a decline in manufacturing's share of total employment.

Figure 3.

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Output and Employment in the Manufacturing Sector

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(Log scale)

Sources: Congressional Budget Office; Department of Labor, Bureau of Labor Statistics; Department of Commerce, Bureau of Economic Analysis.

Note: The vertical bars indicate periods of recession as defined by the National Bureau of Economic Research.

---

The gains in manufacturing productivity have continued recently, even through the downturn in 2001. Since the peak of the last business cycle in March 2001, labor productivity in manufacturing has risen at an average annual rate of 5.5 percent, faster than its average annual rate of growth during previous postwar recessions and the early part of the ensuing recoveries.

Competition from Foreign Producers

A portion of the long-term decline in employment in some manufacturing industries can be linked to the expansion of trade. The gains from trade arise as nations specialize in the goods and services that they can produce efficiently relative to other countries. Thus, the expansion of trade necessarily involves changes in the mix of products. The United States has specialized in products requiring a highly skilled labor force even as lesser jobs have shifted to countries where labor is less skilled. In the apparel sector, for example, the number of jobs in this country has declined from over 900,000 in 1990 to less than 300,000 today.

Some observers have specifically attributed recent job losses in manufacturing to a surge in the bilateral trade deficit with China. From 1992 to 2003, the trade deficit with China grew from $18.3 billion to $124.0 billion, which is larger than the deficit with any other country. However, much of the increase in imports from China reflects a shift away from imports from other Asian countries rather than an increase in total imports. In fact, while U.S. imports attributable to China increased from 5 percent in 1992 to 12 percent in 2003, the share of imports from other Pacific Rim countries declined from 34 percent to 21 percent (see Figure 4).

Figure 4.

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U.S. Imports from China and from Other Pacific Rim Countries

---

(Percentage of total imports)

Sources: Congressional Budget Office; Department of Commerce, Bureau of the Census.

a. Australia, Brunei, Hong Kong, Indonesia, Japan, Korea, Macao, Malaysia, New Zealand, Papua New Guinea, Philippines, Singapore, and Taiwan.

---

Changes in the Structure of Manufacturing Employment

Finally, manufacturing employers increasingly have met short-term fluctuations in demand not by adding permanent staff but by hiring temporary workers through agencies and by contracting with outside firms to provide certain support functions (for example, cafeteria, janitorial, and payroll-processing services). Although those structural shifts probably have little if any effect on manufacturing output, they do reduce the measured level of employment in manufacturing. The expansion of temporary employment probably accounted for between 0.5 million and 1 million of the 2.2 million reduction in manufacturing jobs between 1979 and 2000. But because temporary workers are typically the first to be let go when demand weakens, how much (if any) of the decline in manufacturing jobs since 2000 can be ascribed to the structural change in the sector is unclear. And as the economy recovers, some portion of the rebound in manufacturing employment is likely to be obscured by the hiring of temporary workers and contracting with outside firms.

[RobFromGa]

#57 was as of Spring 2004, so it doesn't register the employment growth of the past year and a half.

[elbucko]

There are only 3 fundamental ways to create wealth. (not money) Mining/oil drilling, Agriculture/logging/fishing, Manufacturing. All the rest is merely paper snuffling or shuffling paper banknotes from one pocket to another.

Right on. Does the economist (?) who wrote this piece expect that one day NASCAR race cars will be built in China? Or that cattle will be raised in Asia, shipped across the Pacific and slaughtered on the way? Corn? Soy beans?

It's the Economist Magazine. Consider the source.

[chimera]

In fact, it's kind of neat how an enemy of the United States today would have to drop bombs on China, Indonesia, and Malaysia in order to hamper our manufacturing capabilities.

They don't have to do that. Once we've sold out our industrial base to foreign countries for a quick buck and are dependent on those countries to sell us military hardware (stuff that we probably invented in the first place), all an enemy of the US has to do is go to those countries and "convince" them that it isn't "in their interest" to sell us that stuff anymore.

When that is done, what are we gonna do? Send our country of lawyers out to bombard the enemy with lawsuits? Send the burger flippers from Mac's out to throw their spatulas at the enemy? Not send them anymore IOUs? That'll sure scare 'em...