There's a basic and often-told story about output and employment in the U.S. manufacturing sector: I'm sure I've told it a time or two myself. The story begins by pointing out that the total quantity of U.S. manufacturing output has actually held up fairly well over recent decades, although it hasn't grown as quickly as the services sector. However, productivity growth in manufacturing has been rising quickly enough that productivity growth. However, manufacturing productivity has been rising quickly enough that, even though manufacturing output has remained fairly strong, the number of jobs has been falling. The standard historical analogy is that just as rising agricultural productivity meant that fewer U.S. farmers were needed, now rising manufacturing productivity means that fewer manufacturing workers are needed.
That story isn't exactly wrong, at least not over the long-run, but Susan Houseman has been digging down into the details and finding arguments which suggests that it is a seriously incomplete version of what's happening in the U.S. manufacturing sector. Houseman presented some of these arguments in a paper written with Christopher Kurz, Paul Lengermann, and Benjamin Mandel, called "Offshoring Bias in U.S. Manufacturing,"
which appeared in the Spring 2011 issue of my own Journal of Economic Perspectives. (Like all articles in JEP back to the first issue in 1987, it is freely available courtesy of the American Economic Association.) In turn, their JEP paper was a revision of a more detailed Federal Reserve working paper in 2010, available here. However, Houseman offers a nice overview of her arguments in an interview recently published in fedgazette, a publication of the Federal Reserve Bank of Minneapolis.
For background, here are four figures created by the ever-useful FRED website maintained by the Federal Reserve Bank of St. Louis. The first shows level of manufacturing output, which since the official end of the recession in 2009 has recovered to the level in 2000. The second shows manufacturing employment, which has dropped off substantially over that time. The third shows annual rates of change in manufacturing productivity, which is volatile, but seems often to be rising at 2-3% per year. And the fourth shows levels of manufacturing compensation, which hasn't been rising since 2000--as one might have expected based on rising productivity in thus sector.
After reading Houseman, when you hear the standard story about how high productivity in
manufacturing is leading to reduced employment, the following thoughts
should rattle through your head:
1) Most of the productivity growth in manufacturing is computers. Houseman: "First, a very important fact, but one I find most people don’t
know—including some people who write a lot about the manufacturing
sector—is that manufacturing growth in real [price-adjusted] value added
and productivity wasn’t that strong without the computer and
electronics industry. The computer industry is small—it only accounts
for about 12 percent of manufacturing’s value added.... But we find that without
the computer industry, growth in manufacturing real value added falls by
two-thirds and productivity growth falls by almost half. It doesn’t
look like a strong sector without computers."
2) Most of the productivity growth in manufacturing computers is because computers are becoming so much faster and better over time, and government statistics count that a productivity growth, not because an average worker is producing a dramatically greater quantity of computers. Houseman: "The standard argument is that the rapid productivity growth in
computers is coming from product innovation. This year’s computers and
semiconductors are faster and do more than last year’s models. And that
product innovation essentially gets captured in the price indexes the
government uses to deflate computer and semiconductor shipments. The
price indexes for most products increase over time—that’s inflation.
But, for example, the price indexes used to deflate computer shipments
have actually fallen by a whopping 21 percent per year since the late
1990s. Those rapid price declines largely reflect adjustments for the
growing power of computers. And that extraordinary decline in computer
price indexes translates into extraordinary growth in real value added
and productivity in the computer industry as measured in government
statistics. So, in some statistical sense, today’s computer may be the equivalent
of, say, 13 computers in 1998. ... The reason jobs in computers have been lost is not
because productivity growth has crowded them out; not at all. It’s
because much of the production has gone overseas...."
3) A sizeable share of what looks like growth in manufacturing productivity is actually from importing less expensive inputs to production. Houseman: "[T]here’s been a lot of growth in manufacturers’ use of foreign
intermediate inputs since the 1990s, and most of those inputs come from
developing and low-wage countries where costs are lower. We point out
that those lower costs aren’t being captured by statistical agencies,
and so, as a result, the growth of those imported inputs is being
undercounted. ... Suppose an auto manufacturer used to buy tires from a domestic tire
manufacturer. Then it outsources the purchase of its tires to, say,
Mexico, and the Mexicans sell the tires for half the price. That price
drop—when the auto manufacturer switches to the low-cost Mexican
supplier—isn’t caught in our statistics. And if you don’t capture that
price drop, it’s going to look like, in some statistical sense, the
manufacturer can make the same car but only needs two tires. ... Our statistical agencies try to measure
price changes, but they miss them when the price drops because
companies have shifted to a low-cost supplier. So because we don’t catch
the price drop associated with offshoring, it looks like we can produce
the same thing with fewer inputs—productivity growth. It also looks
like we are creating more value here in the United States than we really
4) If productivity in manufacturing rises because of automation, then those gains in productivity may benefit the owners of the machines--that is, benefit capital rather than labor. Houseman: "And then another standard story has to do with
automation. Basically, capital is substituting for labor. Automation can
lead to job losses. And the returns from automation, or higher capital
use, won’t necessarily be shared with workers."
5) If low-wage labor-intensive manufacturing tasks are now more likely happen overseas, an higher-wage tasks remain in the U.S., then it may appear as if the productivity of an average U.S. manufacturing worker is higher--but it's just a shift in the composition of U.S. manufacturing workers. Houseman: "Then, finally, there’s probably been some shifting in the sorts of
production that occur here. In particular, less of the labor-intensive
production is done in the United States, and that would result in job
losses and higher labor productivity. Again, the gains from that
productivity growth aren’t necessarily going to be shared with remaining
workers. So part of the answer to the puzzle is that even if
productivity gains are real, there’s really nothing that guarantees
those gains will be broadly shared by workers."
Add all these factors up, and the condition of U.S. manufacturing looks more ominous than the standard story of high productivity and resulting job losses. For more on the future of global and U.S. manufacturing, see this November 30 post on "Global Manufacturing: A McKinsey View."