Is the decline in manufacturing employment due to trade competition? Insights from a decomposition.

(Click on image to enlarge)

Figure 1: Employment change from 1997Q1 (black line), change attributable to output change (blue bar) and attributable to productivity change (tan bar). Calculations based on log differences. NBER defined peak-to-trough recession dates shaded gray. Source: BLS Employment and Costs release, NBER, and author’s calculations.

This decomposition works off of the identity:

h ≡ y – (y-h)

where h is (log) hours in manufacturing, y is real value added output in manufacturing, and (y-h) is value added output per hour.

The graph shows that, while the employment loss during the 2001 recession is due to output reduction — in a Keynesian framework, a decrease in aggregate demand. However, the subsequent job loss is due to rapid productivity growth.

Does this mean that the job loss is not due to trade? Not necessarily; labor productivity growth is not exogenous. Increased import competition might induce accelerated productivity growth. In addition, increased offshoring as specialization breaks up value chains should increase productivity (that is, there is specialization in tasks).

So, while I can’t dismiss international trade as the key reason for reduced manufacturing employment, the decomposition is suggestive that one has to be careful about attributing the bulk to international trade.

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