Is the Growth of Manufacturing Production a Mirage?
by Kenneth Thomas
Is the Growth of Manufacturing Production a Mirage?
A lot of people lament the decline in manufacturing employment, which has fallen by about 1/3 since 2000. As Upjohn Institute economist Susan Houseman points out in the linked article, we’re talking about 5.5 million lost manufacturing jobs in that time frame. Here’s what it looks like in long perspective
Instead of recovering as it did in previous recessions, after the 2001 recession manufacturing employment continued to fall, as Houseman points out.
But a number of commentators, including Matthew Yglesias and some more conservative ones cited by Houseman, have argued that what we really ought to be looking at is manufacturing output, which has risen steadily except for small blips during recessions.
What’s wrong with needing fewer people in manufacturing due to greatly increased productivity?
Houseman argues that the increased productivity is a mirage, due to a single industry, computers. She writes:
Real value added in the computer industry grew at a staggering rate of 22 percent per year from 1997 to 2007 and 16 percent per year from 2000 to 2010. In contrast, average growth of real value added in the rest of manufacturing was just 1.2 percent per year from 1997 to 2007; real value added in the rest of manufacturing was actually about 6 percent lower in 2010 than at the start of the decade.
With that kind of growth, many multiples of GDP growth, we must be an export powerhouse in computers and electronics, right? (Insert joke here.)*
Of course we aren’t, so where does that gigantic growth rate come from? If you remember the debates over inflation that gave us the Boskin Commission, you will recall that one of its criticisms of Bureau of Labor Statistics Consumer Price Index (CPI) data was it did not adequately account for improvements in quality over time. Houseman argues that the huge increases in computer power and semiconductor processing speed are what are beneath the apparently massive growth in productivity in the industry. In other words, the price deflators used to calculate real growth are the real reason productivity is apparently growing so rapidly in computers.
If Houseman is right, it means that falling manufacturing employment really is a problem; we have not become so productive that we simply need fewer manufacturing workers. And the fact that productivity is growing by leaps and bounds, yet our trade deficit in electronics keeps getting worse, seems to me to be strong evidence that she is on to something.
From the Austin Lounge Lizards song, “The Drugs I Need.”*
cross posted with Middle Class Political Economist
It’s not just computers. Houseman’s broader point is that cost savings of US manufacturers due to their outsourcing have inappropriately been classified a gains in US productivity. http://www.washingtonpost.com/business/economy/economists-offer-more-pessimistic-view-on-manufacturing-in-upcoming-report/2012/03/19/gIQAKSpZNS_story_1.html
The data on manufacturing output is presented in Federal Reserve release G.17 (http://www.federalreserve.gov/releases/g17/current/). Your graph in particular is part of Chart 1 (http://www.federalreserve.gov/releases/g17/current/ipg1.gif). Chart 3 (http://www.federalreserve.gov/releases/g17/current/ipg3.gif) shows industrial production excluding high-tech industries have been growing consistently, but not as fast as high tech industries.
The real problem is not the accounting method, of course. It’s the lack of employment opportunities for those of limited education. They are not going to simply disappear while the society somehow magically manages to educate those who are coming up. Outsourcing needs to be penalized in some way and local job production rewarded.
Ahhh, who used to suggest such a methodology for those who outsource overseas to avoid infrastructural costs and the return to sell in the world’s largest consumer market? This is not difference than Romney and others who can set of asset trust funds domestically and overseas to hide capital.
In the face of China’s job growth, I have never understood the excuse of productivity gains for job loss.
So, I found this regarding China. I’m going to assume their “vocational education” is similar to our blue collar jobs of the past.
BEIJING – Out of China’s 6.63 million vocational school graduates, 96.71 percent found jobs last year, a slight increase from 96.56 percent in 2010, figures from the Ministry of Education show.
The results were based on a survey conducted by the ministry last November that covered 109,490 graduates from 146 vocational schools in 10 cities.
According to the survey, processing and manufacture, traffic and transportation, tourism and services, information technology and finance and trade were the five most popular specialties for vocational school graduates when looking for jobs.
Public attitude toward vocational schools, which train students to work in technical fields, has improved in recent years, partially due to surging demand for skilled workers in the manufacturing industry.
In contrast with the job-hunting difficulties that graduates from universities and colleges have faced, skilled workers have had a much easier time finding employment.
Survey results show that 77.26 percent of all the employed graduates work in various enterprises and public institutions, and 13.36 percent started their own businesses.
Also, 75 percent of these newly-employed vocational school graduates started at a monthly salary ranging between 1,000 (156.6 U.S. dollars) to 2,000 yuan, and 19 percent earned more than 2,000 yuan.
With financial support from China’s central government, vocational education has progressed rapidly in recent years. In 2009, China had 21 million students at secondary school age undergoing vocational education.
@David, according to Houseman’s calculations, the table you link is not accurate after correcting for the biases mentioned in the Washington Post article Anonymous discussed. As I quoted her, value added in non-computer manufacturing grew only 1.2% per year from 1997 to 2007, and -0.5% per year between 2000 and 2010. So she and her co-authors are claiming there was no growth once you correct for productivity growth that took place abroad but was wrongly attributed to the U.S.
I’m not convinced that this argument makes sense. For several reasons.
1) Productivity is a residual. We calculate it by looking at output and the number of workers required to gain that output. We cannot therefore calculate back the the other way. Because we derived our productivity figures from output and number of workers in the first place.
2) I can’t see how offshoring makes any difference. The manufacturing production numbers are not, at least I think they’re not, manufacturing by US companies. They’re manufacturing in the US by both US and non-US companies. Thus it’s domestic production, we’ve already removed imports from these figures. Given that offshored production will by definition be imports, they’re not in our production numbers.
Finally, real value added is not the same thing as labour productivity at all. Real value added is combining value added by labour with value added by capital (and land for the classicals).
We can easily construct models in which real value added increases (whether slowly or quickly) or even decreases and still have labour productivity rising or falling. It all depends on what is happening to that value added from capital.
So I really don’t see how you can look at real value added and then make any conclusion at all about changes in labour productivity.
Maybe, for example, labour productivity is increasing strongly (that would explain rising value add and falling employment)and yet capital productivity is growing slowly or not at all: thus neatly explaining two things. Slow real value add growth and also the reluctance of corporations to invest more capital.
All in all I’d say that I was distinctly unconvinced by this argument of yours.
“I can’t see how offshoring makes any difference.”
Hmmm, you do not see a difference in what? Costs or throughput? Two different scenarios and the argument was always costs, most of which was not Direct labor.
frankly i am not convinced that your argument demonstrates anything except the sorry effects of having something to prove so bad it inhibits actual thinking.
i’ll leave it to those more knowledgeable than i am to fill in the details.
at the risk of having an opinion where i have not knowledge, i would offer for your consideration:
the recovery following the Reagan recession was only partial… assuming your graph… only about half the jobs lost were regained.
Greider suggests this had to do with outsourcing that was generated in response to the “high dollar” created by Fed policy… but in any case, outsourcing.
Outsourcing (overseas), contrary to Worstall, is a fact of our times.
Regarding Boskin and “productivity,” I am not sure I understand what you are saying here: if the productivity measures are the result of increases in value added per worker hour in one industry (computers… or finance?) yes, that would suggest that general productivity has not been the cause of reduced employment in general… something i did not think was in dispute, except perhaps among the academics who don’t get out much.
meanwhile, the Boskin “improvements in quality” argument against “inflation” was a cynical essay in schadenfreude. If the car an old person has to buy is “better” than the car he might have bought ten years ago, it still costs him more to drive than it did ten years ago, and while that may be a measure of improved standard of living… unless his wages or pension rise to keep up with that “standard of living” he is going to experience a lower standard of living… because he can’t afford any car that is available on the market, or any computer… which he now NEEDS because the “conveniences of life” are based on the assumption that everyone has one.
and of course the “improvement in quality” created by painting a swoosh on his sneakers may justify the increased profits to the sneaker company… but it means he will go barefoot… or buy Chinese sneakers..
which gets us back to the problem of where did all the jobs go, and why aren’t the workers participating in all this increased “productivity”?
I have to agree on the argument of “improved quality” as an offest for inflation. The argument implies that quality have never improved over the ages. I mean, we’re still mostly using buggy whips as the standard by this methodology.
Improved quality, added features etc for say a car at a given level of spending does not mean less inflations in my mind.
I know, a rise in productivity allows more with less thus less inflation except that productivity is already part of equation. To count it against inflation seems like the argument of “double dip” taxation.
The standard of life has always been increasing, but so has the cost of that standard. Better to see just how many people can afford the new and improved toaster before one looks at that toaster as having reduced inflation. Right now Dollars Stores are even beating Walmart for sales.
Why does improved quality and throughput always have to cost more? Did Henry decide to charge more when he improved his manufacturing throughput (maybe I am wrong here) though assembly lines, I think not. Improved efficiency and quality does not necessarily translate into high coct.
This is provided I understand the thrust of your message to Coberly.
My point is not that increased productivity/throughtput leads to higher cost. It is that such activity does not mean lower inflation rates by necessity.
That we have a higher standard of living today based on greater quality/features/function than yesterday does not mean that such was not happening until someone decided to separate that out as a factor of determining inflation.
Higher standard of living can not be determined as an inflation fighter without looking at how many people actually can afford the new standard. Currently, we are seeing less people afford the new standard to the point that even discount department stores are having trouble with sales numbers verse what amounts to fleamarket shopping in a brick and mortor structure…I give you the Dollar Store.
Thanks, which is whay I asked.
i think there is confusion about what “inflation” means. if it is a technical measure that somehow compares the value of “a dollar” from one period to another.. and this value is useful to economists or bankers, so be it.
but if it is a measure of what it costs to live at some perceived standard of living, or in some identifiable circumstance… then the games that Boskin et al play with the CPI are at least wrong headed if not entirely dishonest.
my understanding (minimal) is that even the Fed had trouble recognizing, or defining, inflation during the early eighties when it seemed to be fighting an inflation that wasn’t there by driving the country into a recession in spite of the Reagan tax cuts.