Can US manufacturing still provide jobs?

Martin Wolf of the FT recently wrote an article that criticising the notion that revitalising the manufacturing sector can increase employment in that sector. This policy was put forward in the US elections especially in the blue collar areas of Pennsylvania and Michigan. The decline of blue collar jobs is inevitable consequence of modern economic growth and technological improvement and attempts to reverse the loss of jobs seem futile.

Wolf highlights the considerable shift in employment across different sectors of the US economy since the early 19th century – see table:

This shift, characterised by a decline in agricultural employment and a rise in service sector employment, is a common pattern observed in developed economies. The article argues that this shift is driven by several factors:

• Differential productivity growth: Productivity has historically grown fastest in agriculture, followed by manufacturing, and then services.

• Income elasticities of demand (YED): YED is < 1 for agriculture which makes it a normal necessity good. For manufacturing it is > 1 for manufacturing which makes it a normal luxury good. Services has a higher value than manufacturing. Any value which is >1 means that the quantity demanded increases at a greater proportion than the change in income for both manufacturing and services

• Elasticities of substitution: the impact of changes in price on the quantity demanded. A sector is influenced significantly by what happens in the other sectors. As elasticities of substitution are <1 the proportion of income spent on a given brand category declines as it becomes relatively cheaper.

Basically the richer the US citizens become the less they spend on manufactured goods.

Wolf identifies two positive and negative forces seen in the US and other high income countries:

Positive – cheaper food and higher incomes which increase spending on manufactures and employment in this sector. Negative – decline in prices of manufactures (relative to services) and the higher the income elasticity demand for manufactures.

Automation, particularly in manufacturing, is another significant factor contributing to the decline in manufacturing jobs. However, there has been a tendency to blame trade with China, for the decline in manufacturing employment. The US trade deficit in goods with China is only 1% of GDP and the overall US deficit in goods is approximately 4% of GDP after the GFC in 2008. Even if the deficit was eliminated it would have a very limited effect on job creation. Note the graph below which shows countries with declining shares of jobs in the manufacturing sector – this is also prevalent with those with long-standing trade surpluses in manufacturing – Japan, Malaysia, Singapore and South Korea.

Is manufacturing more important than other sectors such as software? The focus should be on providing support for workers to develop new skills as the economy evolves, rather than on attempting to revive a bygone era of manufacturing dominance.

Sources:

• Manufacturing fetishism is destined to fail – Martin Wolf – FT 13-11-24

• https://ourworldindata.org