Manufacturing Job Loss is Not Inevitable

by Howard Wial | February 23, 2012

Despite small gains during the last two years, the trend in U.S. manufacturing jobs for the last 30 years has been downward, leading some to argue that long-term manufacturing job loss is inevitable. But our research shows otherwise.

There are two common versions of the “inevitability” argument. One holds that U.S. manufacturing wages are too high to be internationally competitive. The other maintains that manufacturing job losses are the result of productivity growth. Both arguments are false. The United States did not have to lose all of the 6 million manufacturing jobs that disappeared between the beginning of 2001 and the end of 2009. Nor does it have to continue to bleed manufacturing jobs.

High wages cannot be the culprit; because wages in U.S. manufacturing are not especially high by international standards. As of 2009, 12 European countries plus Australia had higher average manufacturing wages than the United States. Norway topped the list with an average manufacturing wage of $53.89 per hour, 60 percent above the U.S. average of $33.53.

Moreover, the United States lost manufacturing jobs at a faster rate since 2000 than several countries that paid manufacturing workers more. Among the 10 countries for which the Bureau of Labor Statistics tracks manufacturing employment, Australia, France, Germany, Italy, the Netherlands, and Sweden both had higher manufacturing wages and lost smaller shares of their manufacturing employment than the United States between 2000 and 2010.

Nor is technology to blame. Factories have become more mechanized, so fewer workers are needed to produce the same amount of manufactured goods. If that were the end of the story, then technology-driven productivity growth would indeed reduce manufacturing employment. But it’s not the whole story. When productivity grows, manufactured goods become less expensive and the market for them expands. The expanding market creates a demand for more workers, and that extra demand usually outweighs the labor-saving impact of mechanization. The result is more manufacturing jobs, not fewer, when productivity increases in manufacturing. 

The huge manufacturing job losses that occurred in the first decade of this century are very difficult to attribute to productivity gains. Between 2000 and 2007 (when the Great Recession began), manufacturing productivity grew at an average annual rate of 3.9 percent—nearly the same as the 4.1 percent average annual rate during the 1990s. If productivity growth were driving manufacturing job losses, then the job losses of 2000-2007 should have been similar to those of the 1990s. That was not the case, though. The nation lost an average of only 0.2 percent of its manufacturing jobs per year during the 1990s, compared to 3.0 percent per year between 2000 and 2007.

If neither productivity growth nor uncompetitively high wages cost us manufacturing jobs, what did? 

One likely reason is there was insufficient productivity growth in U.S. manufacturing. If U.S. manufacturing productivity had grown more rapidly, American manufactured goods would have been more competitive with those of other countries. As a result, the U.S. would have lost fewer manufacturing jobs.

Another likely culprit was incentives for manufacturers to offshore work to low-wage countries, which accelerated after China joined the World Trade Organization in 2001. After China’s accession to the WTO, the U.S. trade deficit with China (which is due mainly to the offshoring of manufacturing) grew at an accelerating rate. The manipulated currencies and artificially low wages of China and some other low-wage countries made those countries attractive locations for manufacturers seeking low labor costs.

Neither massive offshoring nor insufficient productivity growth was inevitable, and neither should be treated as inevitable in the future. Both were the result of public policy choices. The United States could have reduced the incentives for manufacturers to offshore jobs by taking a harder line against China’s currency manipulation and wage suppression. It could have improved productivity growth at home by increasing rather than cutting funding the Manufacturing Extension Partnership program, which helps small and medium-sized manufacturers improve performance.

Chinese wages are growing faster than productivity and manufacturers are beginning to reconsider whether the costs of offshoring outweigh the benefits they receive from it. Funding for the Manufacturing Extension Partnership program has increased, and other federal and state efforts to strengthen manufacturers’ performance are taking shape. These trends are the basis for a more robust federal manufacturing policy. If we build that, the United States can stem and even reverse its losses of manufacturing jobs.

 

 

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