What Determines Manufacturing Jobs Growth?

There are several different theories of what determines growth in manufacturing employment. Officials for the Trump administration emphasize the role of trade imbalances, whereas I would argue that real economic growth is the most important factor. The past two years provide an interesting test of these two hypotheses, as job growth has accelerated at the same time that the trade balance in goods has gotten considerably “worse”, i.e. more negative.

The following graph shows 12-month changes in manufacturing employment (blue line) as well as changes in the trade balance for goods (red line):

Clearly, the trade data is a bit noisy, but you can see that in the past year the trade deficit has been getting larger (more negative) at the same time that growth in manufacturing employment has accelerated. Manufacturing employment is a procyclical variable, rising and falling with overall economic growth, whereas the trade balance tends to be countercyclical, falling during booms and “improving” during recessions. (Of course this “improvement” isn’t actually a good sign, but it’s often interpreted that way.

Just to be clear, I’m not claiming that trade deficits have no impact on manufacturing employment. If one hold growth constant, then a bigger trade deficit probably reduces manufacturing employment somewhat. Rather my claim is that the effects of trade are small in comparison to the effects of aggregate growth.

Unfortunately, this point is not well understood. The Financial Times reports that Trump administration officials are viewing the recent growth in manufacturing employment as a sign that their trade policies are working.

Figure of the week: 284,000

The number of manufacturing jobs created in the US last year, which the US trade representative touted on Friday as the biggest increase in 21 years and evidence that the administration’s trade policies were working.

Their argument for protectionism, however, was based on the claim that manufacturing jobs could be created here if we reduced the trade deficit. Instead, Trump policies such as the corporate tax cut have boosted the trade deficit. Indeed even our trade deficit with China has increased.

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