Magazine

Those Manufacturing Myths


By Laura D'Andrea Tyson The U.S. economy has been recovering from the 2001 recession for almost five years, yet manufacturing employment is still down 10%, or 1.6 million jobs, from November, 2001. By contrast, manufacturing employment rose an average of 7.5% in previous recoveries that lasted as long as this one. What's behind the unprecedented weakness in manufacturing jobs? There are no simple answers, but some myths should be dispelled.

Manufacturing employment has fallen steadily as a share of total U.S. private-sector jobs, from about 35% in 1950 to under 13% today. The same long-term trend can be seen all over the world (even in China) and for the same reason: rapid productivity growth. In the U.S., an hour of work produced four times as much manufacturing output in 2000 as in 1950. But demand for that output, which would have had to grow as least as fast as productivity to support the proportionate creation of manufacturing jobs, hasn't kept pace.

The 2001 recession aggravated the mismatch between productivity and demand. Business investment, which grew unusually fast in the second half of the '90s, fell sharply, hitting manufacturing hard. Foreign demand for U.S. goods also declined because of a strong dollar and slowdowns in Europe and Japan. Meanwhile, imports continued to rise, and the trade deficit in manufactured goods ballooned. But contrary to popular belief, the combination of strong productivity growth and weak domestic demand -- not the trade deficit -- was the primary cause of lost manufacturing jobs during the past five years. And the major culprit behind the yawning trade imbalance was slumping exports, not surging imports.WHAT'S MORE, A TRADE SURPLUS in manufactured goods would not necessarily translate into job gains. The U.S. is the world's biggest producer of manufactured goods, but Germany is the biggest exporter, and it enjoys a large trade surplus in manufacturing even though it has been losing manufacturing jobs at a faster rate and has a much higher unemployment rate than the U.S. Germany's experience also shatters the myth that a high-wage economy is destined to run a large deficit in manufactured goods because of competition from low-wage countries. At the right exchange rates, with the right high-value-added products based on innovation, education, and productivity, high-wage countries such as the U.S. and Germany can still win commanding shares in global export markets.

Another misconception about manufacturing is that it provides better middle-class career opportunities for high-school grads than other sectors. This may have been so 20 years ago, but not anymore. Manufacturing still offers relatively high-wage jobs vs. the rest of the economy. But as in other sectors, higher education is becoming critical. Harvard University professor Larry Katz, chief Labor Dept. economist under President Bill Clinton, notes that about half of all manufacturing workers now have some college, and almost 25% have college degrees. In manufacturing, college grads earn double the wages of nongrads even after adjusting for experience. But for nongrads, the wage gap between manufacturing and other jobs has narrowed to only about 5%. For such workers, manufacturing jobs are no longer a reliable gateway to a middle-class life.

Still, manufacturers provide a greater share of their hires with health insurance than other employers. About 56% of U.S. workers have health coverage through their jobs. But over 70% of manufacturing workers are covered, vs. only 52% in retail and wholesale jobs and only 30% in the recreation, hotel, and food sectors.

Recent evidence confirms suspicions that soaring health-care costs drag down job creation in U.S. manufacturing. Since 2000, sectors with above-average hikes in such costs, including manufacturing, have had slower job growth than other parts of the economy. A recent National Bureau of Economic Research study shows that rising health insurance premiums boost unemployment, push more workers into part-time jobs, and force employers to cut wages and other benefits.

What do the facts about manufacturing jobs imply for policymakers? Health-care reform to contain costs is a must. Technology policies to foster the creation of new products with strong demand potential and education policies to strengthen worker skills will help. Workers displaced from manufacturing should receive generous adjustment assistance to move into new jobs. And trade policies should focus on expanding exports not on restricting imports. Laura D'Andrea Tyson is dean of London Business School (ltyson@london.edu).


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