Manufacturing & Technology

ECONOMIC ANALYSIS: Perceptions of manufacturing don't match reality

October 15, 2007

There's no way to miss the dramatic loss of manufacturing employment Indiana has experienced in the past generation. Since about 1980, there has been a roughly 60-percent drop in the number of manufacturing workers in the state. Why is this so?

Many Hoosiers blame globalization for these job losses (even if they support free trade). There's plenty of anecdotal evidence by way of Chinese-made toys. But once you get past this anecdote, the data tells a very different story.

The United States imports more goods than it exports. I often hear that this is both bad and unsustainable. But history tells us otherwise. We've been running this trade imbalance since the 1970s, a period of American economic dominance. Today, the trade imbalance (our exports minus imports) amounts to more than $800 billion. That is a big number, but to put it into perspective it is roughly equal to the size of the U.S. movie industry. But how can we keep buying more than we're making? There are three answers.

The first is, we're not. The trade data counts only the value of goods shipped-it misses the value of traded services. So anytime a non-goods transaction occurs, it is likely to be missed. For example, if each of the 600,000 or so foreign students studying at U.S. universities pays $30,000 for room and board, we are actually exporting $18 billion that's not captured by trade data. Second, many developing countries are actually subsidizing U.S. consumers indirectly by keeping their currency undervalued. Third, U.S. banks are so safe that foreign depositors pay a premium for this privilege. This foreign investment subsidizes our consumption of goods.

In the end, only a fraction of job losses in manufacturing can be explained by foreign trade (I calculate less than 5 percent of the total over the past 25 years). We have to look elsewhere for the culprit. There are two other explanations. The first is that businesses are increasingly outsourcing specific nonproduction line tasks. So jobs ranging from human resources to custodial work that used to be counted as a manufacturing job are now performed under contract by another firm. Thus, a part of the loss in manufacturing (and growth in services) is a statistical artifact of how jobs are counted. But this doesn't explain even a quarter of the losses.

The fundamental cause of most of our manufacturing job losses is simply increasing worker productivity. Since the late 1970s, the U.S. population has been rising about 1.1 percent per year, but the value of manufactured goods produced by each worker has been rising 4 percent per year. The higher demand for goods (due to higher population) is heavily outpaced by the productivity growth of manufacturing workers. It takes only 18 years for manufacturing workers to double the value of the goods they produce (in inflation-adjusted dollars). If you add the overall population growth rate-as a good measure of growing demand-factories can cut their labor force 50 percent every 22 years. That's just about what has happened in Indiana over the past generation.



Hicks is director of the Bureau of Business Research at Ball State University. His column appears weekly. He can be reached at bbr@bsu.edu.
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