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The Role of Manufacturing in a Jobs Recovery

Problems in the U.S. labor market were evident well before the start of the recession in 2008.  The U.S. economy was dubbed the American jobs machine in the 1990s, but employment growth abruptly slowed after 2000, leading to a sizable decline between 2000 and 2007 in the employment rate among working-age adults. 

The precipitous loss of jobs in the U.S. manufacturing sector has been a major force behind the sluggish job growth and declining employment rates that the U.S. economy has experienced since 2000. Although the share of workers employed in manufacturing has been declining for decades, the number of manufacturing jobs was relatively stable between 1970 and 2000.  In the seven years leading up to the Great Recession, manufacturing employment dropped by 3.4 million, or 20 percent.  Manufacturing lost an additional 2.3 million jobs during the recession and has regained only a half million of those jobs during the last three years of recovery.  Today, employment in U.S. manufacturing is 30 percent less than in 2000. 

While most acknowledge that the deep cuts in manufacturing employment have significantly contributed to the jobs problem currently facing the U.S. economy, there is little consensus that a resurgence in U.S. manufacturing can be part of the solution.  The reason is that official output statistics point to a sector that is already healthy.  Except during recessions, U.S. growth in real (price-adjusted) value-added has outpaced that of aggregate gross domestic product.  Large employment declines accompanied by above-average output and productivity growth have led many to conclude that the sector’s job losses are largely the result of labor-saving technology. 

Nobel laureate Gary Becker and other prominent economists have likened manufacturing to agriculture. Even though the U.S. agricultural sector produces an abundance of food and exports the surplus, farms employ few Americans today because of automation.  If the sharp job losses in manufacturing since 2000 are the inevitable result of technological progress, then output growth will generate few employment gains.  Manufacturing, the argument goes, is unlikely to play an important role in any future jobs recovery.  Former Labor Secretary Robert Reich succinctly expressed the views of many economists when he wrote, “Manufacturing jobs are never coming back.”

This view reflects a fundamental misunderstanding about what manufacturing statistics measure and what they mean.  Output growth in most manufacturing industries — those that account for the large majority of the sector’s value-added and employment — has been weak or negative.  Although automation undoubtedly has displaced some workers in manufacturing, a growing body of research suggests that trade and the decline of the United States as a location for production have accounted for much of the sector’s job loss.  In addition, the employment effects of manufacturing production extend well beyond that sector.  The breakup of vertically integrated firms and the growth of complex supply chains mean that a large share of the workers needed to produce manufactured goods — currently about half — is employed outside the manufacturing sector.  A strong domestic manufacturing presence also is critical to innovation and the growth of high-skilled jobs. 

Returning the country to full employment is the highest domestic priority for the Obama Administration.  Not only can a resurgence in U.S. manufacturing be an important component of a jobs recovery, but a vibrant domestic manufacturing sector is essential for the global competitiveness of American workers. 

The full report is available here in PDF format.