Opinion Editorial | |
| Wednesday, January 20, 1999 | |
Myth Of America's Declining Manufacturing Sector |
A few weeks ago there was an interesting juxtaposition of articles in the Washington Post and New York Times regarding the fate of manufacturing in the U.S. and Japan. The Post article lamented the decline of manufacturing in the U.S., making much of a recent fall in the National Association of Purchasing Managers index. Meanwhile, the Times ran an article about manufacturing in Japan, noting that companies there are wasting money investing in new plants when there is no apparent demand for their products, thereby contributing to its economic malaise.
Thus one article implies that steps should be taken to stimulate manufacturing activity here, while the other says that too much manufacturing capacity is what is holding back growth in Japan. In truth, much of Japan's problem stems from taking the advice of those, like the Post reporter, who see something special in manufacturing -- making "things" as opposed to providing mere services. This led Japan to adopt industrial policies, such as trade restrictions and government subsidies, to build up its manufacturing industries. In the 1980s, many people advocated such policies here. Had their advice been followed, the U.S. economy might now be in as much trouble as Japan's.
There are two main reasons why people focus excessively on manufacturing. First, they note that manufacturing employment has fallen sharply as a share of total employment. In 1950, workers in goods-producing industries accounted for 41 percent of all employment. By last year, it had fallen to 20.1 percent, less than half that figure. Since manufacturing jobs have tended to pay more than service jobs, the assumption is that millions of "good" jobs have disappeared owing to our neglect of manufacturing.
But as an article in the Labor Department's Monthly Labor Review (February 1998) notes, there are many service jobs that pay more than many manufacturing jobs. So it is false to assume that manufacturing jobs are always better than service jobs. Taking account of benefits, job security, workplace safety and other factors, the article says that on balance service jobs compare favorably to those in manufacturing. "Employment shifts away from manufacturing and toward services do not necessarily signal a deterioration in overall jobs quality," it concludes.
A second reason why people focus on manufacturing is because they note its sharp decline as a share of total output. In 1950, the production of goods accounted for 55 percent of the gross domestic product (GDP). By 1998, that figure had fallen to just 36.5 percent. Thus the assumption is that if manufacturing had not declined, total output in the economy would be higher.
But this analysis is actually based on faulty data, looking at output in nominal (money) terms without adjusting for price changes. This is important because prices for manufactured goods have fallen relative to prices for services. When one adjusts for this factor, looking at real (inflation-adjusted) goods production as a share of real GDP, one sees that not only has manufacturing not fallen, it has increased its share of GDP. In 1950, real goods production accounted for 37.3 percent of real GDP, according to the Department of Commerce. Last year it accounted for 39.8 percent. Indeed, manufacturing hit its lowest share of real GDP in the early 1960s -- the "good old days" for many people -- and has risen almost continuously since.
When output rises while employment falls, the result is an increase in productivity, which is good. And according to the Labor Department, U.S. manufacturing productivity is now higher than in any other major country, including Germany and Japan. Those who worry about the decline of manufacturing in the U.S. should find something better to worry about.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, January 20, 1999.
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