1 April 2007

Lies and statistics: Raw job numbers steady; productivity soars

By Michael Bond

The decline of manufacturing in the U.S. is indisputable ... sort of.

Indeed, some statistics bear this assertion out. Manufacturing as a percentage of the U.S. economy-the largest economy in the world-has gone from over 25% in 1950 to around 12% today.

These numbers, however, are quite misleading because they do not adjust for the relative price of manufactured goods.

The price of manufactured goods in this period went down over 50%, relative to non-manufactured output. When manufacturing translates in real terms, its share of gross domestic product (GDP) has remained about the same as in 1950.

Real manufacturing output has kept pace with the general economy since 1950. It has shown no long-term decrease.

While it is true the U.S. has lost manufacturing jobs since 1980, the number of employees in manufacturing is around the same now as in 1950.

Even the decline in manufacturing employment since 1980 is partially suspect given many jobs originally done in house have been outsourced domestically. One can think of accounting, legal, secretarial, and other white-collar type employment.

Assuming the current figure of 14 million jobs is correct, manufacturing has declined from around 30% of total employment in 1950 to around 10% now.

Since real manufacturing output has not changed since 1950, it must be around five times larger today since the real economy is that much bigger. Therefore, what we have is the same number of manufacturing employees producing around five times as much per worker.

By contrast, the remaining workers in the U.S. made nowhere near that type of gain and output per employee. It is clear dramatic gains in manufacturing productivity have made additional manufacturing employment unnecessary.

A popular belief is the significant increase in the U.S. trade deficit in manufactured products has reduced American manufacturing output and employment.

Unquestionably, the purchase of imported manufactured products will replace some domestic production. Since the manufacturing trade deficit has increased substantially in the last few years a static analysis would suggest the real manufacturing output in the U.S. should have declined.

In fact, manufacturing has grown faster than the overall U.S. economy since the recession ended in 2001. There are two reasons for this. The first is a significant portion of manufacturing imports relates directly to intra-company trade. If BMW in South Carolina imports fenders from Germany for installation in Z4's, U.S. manufacturing output also rises from the value-added associated with the production at the Spartanburg plant.

Second, U.S. GDP growth has been over 3% per annum for the last four years. Since imports subtract out of GDP, domestic spending growth has offset the leakage related to rising imports.

The increase in real-domestic spending in this time has created demand for other manufactured products that has offset those lost to increasing imports.

This is not to say there have not been significant changes in the composition of manufacturing since 1950 in the U.S. American manufacturing has become significantly more high-tech than it was in 1950.

In just the last 25 years, this trend has accelerated with high-tech manufacturing output increasing from 10% to close to 25%. It is also reflected in the fact that, while the U.S. has a large overall trade deficit, exports of capital goods are approximately equal to imports of those items.


Michael Bond Ph.D. is a professor of finance at the Cleveland State University and the senior fellow in health care policy at James Madison Institute in Florida.