As Americans prepare for a new administration, we can expect the issue of job losses from international trade to be front and centre. The preservation of manufacturing jobs, in particular, has become a political touchstone. Now that the election campaign is over, it is incumbent on policy makers to look beyond the rhetoric and to delve more carefully into the issues of how the U.S. manufacturing sector has changed over the past decade and what might be its future.

To begin with, contrary to many observers, U.S manufacturing has not been on the decline. After a brief drop in 2008-9, manufacturing output has resumed its long-term trend (Chart 1). By 2014, the manufacturing economy had recovered completely from the sharp decline of in 2008. Leading the growth in manufacturing has been the growth of durable goods for the domestic and export markets. The produc­tion of consumer non-durables (goods used for less than a year) such as clothing and food products has remained static for a decade. Other important sectors, such as transportation equipment and computers and electronics, enjoy continued growth. The country’s growth of manufacturing has been a constant feature of the economy throughout the recovery from the Great Recession. This contrasts with the belief among many observers that U.S. manufacturing is in secular decline. While output continues to expand, the same cannot be said of manufacturing employment, which clearly has been on the decline.

Chart 1 Manufacturing Output, 1987-2016

What Happened to Manufacturing Jobs and Why?

The decline in manufacturing jobs is not just confined to America. As Chart 2 reveals, even the manufacturing powerhouses, such as Germany, Japan and South Korea, all have experienced a steady decline in factory employment as a percentage of total employment. In relative terms, the decline can be traced to the rise of service employment as part of the latter stages of economic development. In absolute terms, the decline is significant and requires greater understanding.

Chart 2 Manufacturing Employment Share of Total Employment 

 A recent study from Ball State University (BSU) has isolated the biggest single reason for the loss of jobs in manufacturing.[1] The study concludes that:

“Three factors have contributed to changes in manufacturing employment in recent years: Productivity, trade, and domestic demand. Overwhelmingly, the largest impact is productivity. Almost 88 percent of job losses in manufacturing in recent years can be attributable to productivity growth, and the long-term changes to manufacturing employment are mostly linked to the productivity of American factories.” (Table 1)

Table 1 Impact of Productivity Gains and Trade on Job Losses

These results fall in line with other studies which show that of the 5.7 million jobs lost in manufacturing since 2006, over 4.9 million were due to productivity improvements. The BSU study continues with an interesting analytical comparison. The researchers state that “had we kept 2000-levels of productivity and applied them to 2010-levels of production, we would have required 20.9 million manufacturing workers. Instead, we employed only 12.1 million”. Labour was shed in the interest of improving the production process so as to remain competitive against domestic and foreign competition.

So, it was productivity improvements that allowed U.S. manufacturers to compete successfully both domestically and abroad. It was those same productivity improvements, however, that led to the loss of manufacturing jobs. Further productivity improvements can be anticipated from increased use of robotics and artificial intelligence. This is especially the case given recent estimates that there are more than 335,000 unfilled manufacturing jobs due to the lack of qualified labour. [2]Arguing that “unfair“ trade is behind the loss of high-paying jobs misses the technological changes that are shaping the manufacturing landscape.

[1] M. Hicks and S. Devaraj “ The Myth andRealty of Manufacturing in America”, Centre for Business and Economic  Ball University, 2015

[2] http://www.wsj.com/articles/when-presidents-defy-economic-gravity-gravity-usually-wins-1481131697