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In the Nation's Interest

Manufacturing Jobs and America’s Future

Just about every presidential candidate in my adult lifetime has promised to boost US manufacturing employment.  In recent decades, that rallying cry has included, “Bring all the jobs back home!”  Current presidential candidates have blamed poorly negotiated trade agreements and corporate plutocrats who would export jobs for an extra $2 in profits for the decline in manufacturing jobs, allegedly lost to other countries.

In that context, it must have been jarring for those candidates to learn in a recent news story that Foxconn, that Chinese poster child for exported US manufacturing jobs (assembling iPhones for Apple), will lay off 60,000 of its workers and replace them with robots.  (Does China have money-grubbing capitalist CEOs too?  Or did we both lose on that trade deal?)

It might not have been so surprising if those candidates had been aware that US manufacturing employment has been falling (in raw numbers of jobs, not the percentage of the work force) almost consistently since June of 1979 – a decade and a half before NAFTA.  (See chart one.  And ironically, one significant period of relief in that long-term downward trend was the half-decade or so after NAFTA’s effective date on January 1, 1994.)

And in fact, the United States is far from an outlier in this regard.  Virtually all industrialized nations have faced declining manufacturing employment in recent decades, as shown in data compiled by our partners at The Conference Board.  (See chart two.)

But how can that be?  Where are all of those lost manufacturing jobs going?  And how are we in the United States going to get all of those lost jobs back?  (After all, some presidential candidates have promised to do so.)

The bad news is that our nation is in a box – a true Catch-22 – over manufacturing employment.  The good news is that this box is nothing new; as the date in chart one and chart two clearly show, we have been dealing with this conundrum for decades, as have all of our major developed-nation trading partners.  The box may well be getting tighter.  But we can work our way through it if we have the will to do so – and if we assemble and face up to the facts:

The loss of manufacturing employment has been a painful hit on US workers.  Jobs in manufacturing traditionally have been an important source of income for millions of Americans, including many without college educations.  The drop in the number of manufacturing jobs in the financial crisis is a potential explanation for the very slow recovery of the labor force participation rate, and hence the size of the US work force.  (Note from chart one that manufacturing employment has recovered steadily, though slowly, since the worst of the financial crisis.)

Manufacturing jobs are not so much moving as disappearing.  There is no way to keep them indefinitely either here in the United States or anywhere else on earth.  The data in chart two show how broadly based the decline in manufacturing employment really is.  The increases in Korea and Taiwan are by no means equal to the declines elsewhere in the developed world.

The news from Foxconn in China only amplifies this message.  For a time, China could follow a strategy of centrally planned export-based growth (which means manufacturing).  It was comparatively easy for China to move its population from under-developed rural areas and put it to work in manufacturing (and construction).  With very low wages, China could bid for US manufacturing jobs.  Given China’s vague and unreliable economic data, the United States could never be certain just how much manufacturing employment China had, and how much US employment it had acquired.  But the Foxconn developments strongly suggest that the command-and-control export-led-growth strategy is running its course.  Foxconn has found that Chinese labor at Chinese wages cannot compete with industrial robots for the assembly it undertakes.

Some of Foxconn’s work may have been offshored to other nations (Vietnam is mentioned) that are a step behind China in development and in wage rates.  But that really does not matter.  Such off-shoring is only a way station on the road to automation.  Jobs that can be off-shored can be automated.

Economist-speak for this process is rapidly increasing productivity.  It simply takes fewer man-hours to produce more manufactured goods today than it did 10, 20, or 40 years ago.  All of those developed countries that have suffered falling manufacturing employment still have enjoyed rising levels of manufactured output.  (See chart three.)  And at the same time, with our rising levels of affluence as a society, we are consuming relatively more services and relatively less manufactured output.  It is clearly indicative of this trend that Americans now spend more on eating out than we do on eating at home.  Our relative amounts of spending on goods versus services broadly have shifted in an analogous direction.

We may well enjoy an “American Manufacturing Renaissance.”  But we will not “get all of our manufacturing jobs back.”  An irony of the trend of automation revealed in the Foxconn story is that the United States has a crack at expanding our manufacturing sector even further.  Wages in China may be cheaper than in the United States, but robots aren’t (broadly speaking).  There are strong reasons to manufacture close to your market for sales.  It saves shipping time and costs.  It shortens improvement cycles if problems are discovered in products, or if consumer tastes change.  The growth in manufacturing jobs since 2010 in the recovery from the financial crisis – even as productivity has risen – is a reflection of these forces.

But this growth in manufacturing activity does not “bring all of the jobs back.”  The numbers of new jobs from renewed US manufacturing today will be lower than the numbers of old jobs that had moved overseas – precisely because of the intervening rapid increase in productivity.  The nation will get good jobs – better, in fact, because they will utilize more skill.  But there will not be as many of those jobs.

In truth, there is an eternal tension between the level of wages and the number of jobs.  A fairly broad range of physical (and, increasingly, mental) work can be automated.  The threshold question is the price – that is, the wage that the relevant labor commands today.  The higher the wage, the more it makes sense to automate.

Some would argue that undertaking such automation is heartless, or even immoral.  The Luddites certainly did, 300 years ago.  To similarly minded groups today, the solution to the decline of manufacturing employment is simply to stop automation, and to keep the jobs the same – and here in the United States.  We have heard in the presidential campaign that, if necessary, we can simply impose prohibitive tariffs on foreign goods (including those from off-shored US firms’ operations).

We cannot do that.  Assume that such tariffs would be effective in keeping foreign goods out (which they might not).  Then the United States would quickly become an industrial backwater.  US firms might well build those more-efficient foreign operations, but use them to service foreign markets instead of exporting US production.  Other nations might well retaliate with tariffs on our exports as well. US producers would lose access to the most cost-effective intermediate inputs, if they are made overseas, as they try to maintain competitive US production.  Talent in the process of efficient manufacturing would go elsewhere.  What would our nation have gained?  As foreign firms expanded their competitive advantage over us, we would fall farther and farther behind in the time that it would take us eventually to catch back up to the state of the art.  That gap in technology could begin to affect our arms production, and therefore our national security.  Tariffs will of course also add to consumer prices.  Such protectionism is a naïve prescription for our nation’s early decline to second-class status.

So what can we do?  We cannot stop the flow of technology, and we cannot protect ourselves from international competition.  We stand a good chance of expanding our manufacturing base, but it will not turn back the clock to the good old days.

We need to do more of the blocking and tackling of economic development.  We need the best-prepared, most-competitive work force.  That means better and more affordable education from preschool through post-secondary, but it means much more than that.  Not every job requires a college education, but every high-paying job requires skills and essential competencies.  CED’s project on this topic could be an important first step.

And we also need awareness on the part of every US business leader.  US workers are hurting.  We need to pursue training and skills strategies to build successful high-wage manufacturing (and other line of business) models wherever possible.

From the Luddites (and even further before) to today, “automation” has been decried and feared.  Living standards have advanced nonetheless.  Today, we face ever-deepening challenges to achieve growing prosperity for all Americans.  That is what CED is all about, and we welcome that challenge.