Evans On The Economy -- More Jobs Will Be Lost

Feb. 24, 2005
Manufacturing workers will be hurt, but not the U.S. economy generally.

What will happen to the U.S. economy as manufacturing employment continues to shrink? During the past decade, U.S. manufacturing employment fell by 2.3 million jobs. Retail employment rose by 1.6 million. Government employment rose by 2.2 million. And health-care employment rose by a whopping 3.2 million. Employment in manufacturing is now below any of those three sectors. Or put another way, it now takes more people to sell the nation's output than it does to produce it.

Although recent figures from the U.S. Labor Department's Bureau of Labor Statistics show that U.S. manufacturing employment actually eked out a 76,000 gain during 2004, do not be misled. It is a far smaller gain than was reported for similar phases of earlier business cycles. And it will not be repeated. Over the next several years, manufacturing employment will continue to decline, and I think the 2.3 million drop over the past decade will be repeated -- if not exceeded -- during the next decade.

Some apologists for the U.S. manufacturing sector like to point out that the trend line is misleading because productivity is rising so much faster in manufacturing than in services. Tell it to all the people who have lost their jobs. Tell it to the people who have lost their jobs and aren't going to get them back. But more to the point, the apologists' generalization about manufacturing productivity outpacing service-sector productivity is no longer true. Service sector productivity has grown at record rates over the past decade.

Where have all the manufacturing jobs gone? That's not much of a mystery either. In 1994, the U.S. trade deficit with the rest of the world was about 1% of GDP. Now it is almost 6%, which means the U.S. international trade deficit rose about half a percentage point every year. Almost all of that rising deficit was in manufacturing, and manufacturing accounts for about 25% of GDP. I won't take you through the rest of the arithmetic. But what it adds up to is that the rising trade deficit resulted in domestic manufacturing growing about 2% less per year than the rest of GDP. Now you don't need to be some kind of a math wizard to figure out that if manufacturing employment was about 17 million a decade ago, that 2% annual decline accounts for all the job loss of the past decade and then some.

However, since the current U.S. unemployment rate is seven-tenths of a percentage point lower than it was in 1994, the overall U.S. job market hasn't been hurt. The U.S. economy has swapped manufacturing jobs for service jobs.

What's more, according to Bureau of Labor Statistics' statistics, inflation-adjusted average wages of hourly workers have risen only half a percentage point per year over the past decade. Given the understatement of inflation, it is obvious that the real wage for hourly workers has actually fallen over the past decade. And this will continue to happen over the next decade.

Inflation-adjusted disposable income -- the money that people can actually spend -- rose an average of 3.3% a year during the past decade, meaning a lot of people got richer. But they weren't hourly workers. They were management. Or independent businesses. This trend, too, will continue.

As a result, the U.S. economy will continue to prosper. But hourly manufacturing workers will not.

Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.

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