Manufacturing job loss: Productivity is not the culprit

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Snapshot for February 21, 2007.

Manufacturing job loss: Productivity is not the culprit

by Robert E. Scott

The United States lost 3.1 million manufacturing jobs between 2000 and 2006. Despite reasonably strong GDP growth over the past three years, manufacturing employment has not recovered. There is a widespread misperception that rapid productivity growth is the culprit for continuing job loss in the sector.

Employment growth in any economic sector is essentially the difference between growth in output and productivity (output per hour). Output growth, all else equal, spurs employment while productivity growth dampens it. The figure below illustrates why manufacturing employment has fallen so rapidly over the last three years.

Between 1989 and 2000, manufacturing output and productivity growth averaged, respectively, 3.5% and 3.9% per year. As a result, the two largely offset one another and manufacturing employment was relatively stable, as shown in the figure. Since 2000, productivity growth nudged slightly upward relative to the previous decade, increasing 4.2% per year. Output growth, however, cratered, and has averaged only 0.8% per year since 2000. Employment fell 3.2% per year as a result. In short, it is slow growth in manufacturing output—not an acceleration in productivity—that makes 2000-06 different from the previous decade and explains the steep fall in manufacturing employment.