The Case Of The Missing Jobs

Slower output growth and sizzling productivity have curbed factory job creation

By David Huether

Manufacturing in America is producing and exporting more goods than ever before. In 2004 and 2005, manufacturing's expansion easily outpaced that of the larger U.S. economy. Yet after losing 1.5 million jobs during the 2001 recession, manufacturing has shed another 1.5 million workers -- even as the rest of the economy has since added more than 5 million new jobs.

What's going on here? Why is manufacturing employment, at 14.2 million workers, at its lowest level in more than 50 years while manufacturing output is at an all-time high?

Some blame the outsourcing of American factory jobs to rapidly industrializing low-cost countries such as China and India. Others fault our growing trade deficit. And some posit that the current manufacturing recovery has not generated as robust a demand for U.S. goods as have previous post-recession upturns. But none of these interrelated factors has influenced manufacturing employment nearly as much as has continuously strong productivity growth.

Since 2001, with the aid of computers, telecommunications advances, and ever more efficient plant operations, U.S. manufacturing productivity, or the amount of goods or services a worker produces in an hour, has soared a dizzying 24%. That's 72% faster than the average productivity advance during America's four most recent recession-recovery cycles dating back to the 1970s. In short: We're making more stuff with fewer people.

U.S. manufacturing has for decades been the world leader in the productivity gains that drive living standards higher. But more recently, practically every manufacturing economy around the globe has posted strong productivity gains and experienced job losses as a result. Although you'll never hear it reported by protectionist pundits, China has actually lost more manufacturing jobs than America since 2000, with 4.5 million jobs gone vs. 3.1 million in the U.S. Among the top 10 industrialized economies (the U.S., Japan, Germany, China, Britain, France, Italy, Korea, Canada, and Mexico), which represent 75% of world manufacturing output, only Italy managed not to lose factory jobs since 2000.

It's certainly true that U.S. manufacturers face stiff competition in low- and mid-tech products from increasingly capable global rivals. Our trade deficit is a reflection of those competitors' collective capacity to deliver affordable consumer products to America and other international markets. But it's also true that persistently slow economic growth in Japan and Europe has limited demand for U.S.-made goods and thus worked to lower post-recession output from American plants, as did the uncertainties caused by the September 11 attacks, corporate scandals, and the buildup to war in Iraq during the early stages of our current expansion.

So, contrary to popular belief, it has been this lower demand and output, coupled with high productivity growth, that has conspired to depress the kind of manufacturing job creation we might otherwise have expected since 2002.

U.S. manufacturing output has increased a welcome 13% since the end of 2001. [It continues to grow] But that growth is barely half the average increase during the initial four years of the previous four recoveries. Remember, our manufacturing productivity has increased significantly faster than in earlier recoveries. You don't have to be an economist to see how this combination of far slower output growth and much higher productivity has been very bad for employment. Indeed, if manufacturing output and productivity growth rates during the current recovery had equaled those averaged during the previous four upturns, U.S. manufacturing would have created 3 million more jobs than it has, and employment would have recovered to its pre-recession level of 17.2 million by the end of 2005.

Fortunately, demand for American-made products has increased, and manufacturing's output has grown at a solid 4.8% annual pace during the past two years. Because that figure almost matched manufacturing's 5.1% productivity growth, factory employment has remained relatively stable. But U.S. manufacturers aren't about to invest any less in productivity improvements in future years. International competition won't let them. Looking ahead, the number of manufacturing jobs we create or lose will depend entirely on the global demand for U.S.-made products.

Views expressed in Outside Shot are solely those of contributors.

David Huether is chief economist at the National Association of Manufacturers.

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