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Snapshot for November 30, 2005.

Trade deficits and manufacturing employment

Production in the United States in recent years has become more and more oriented toward non-traded goods (e.g., residential housing investment and commercial construction) and away from traded goods (e.g., like manufacturing, which supplies roughly three-quarters of U.S. traded goods).

This shift has led to ballooning trade deficits in manufactured goods, and these trade deficits have led directly to large-scale job loss in this sector. Manufacturing employment in 2004 reached its lowest level since 1950 (14.3 million jobs). Commentators often claim that this shedding of manufacturing jobs is a long-run (and hence implicitly benign) phenomenon.

Unfortunately, it is not.

Between 1965 and 2000, manufacturing employment never dipped below 16.5 million. The manufacturing sector’s share of employment in the overall economy shrank over time, as net job creation happened mostly in other sectors, but the level (that is, the actual number) of manufacturing jobs, was generally stable.

Between 2000 and 2004, manufacturing dropped 3 million jobs (a 17% decline), while the trade deficit in manufactured goods rose by $164 billion (a 42% increase). This rise in the trade deficit means that an increasing share of domestic demand for manufacturing output is satisfied by foreign rather than domestic producers. The ratio of domestic output to domestic demand has fallen from 86% in 2000 to 80% in 2004. Between 1977 and 2000, this ratio averaged 95%. In other words, the manufacturing trade deficit has risen from a 1977-2000 average of 5% of domestic demand to 20% of demand by 2004. This rise coincides directly with the hemorrhaging manufacturing employment over this period, as is shown in the chart below.

It is often claimed that declines in manufacturing employment stem entirely from productivity growth. However, rapid productivity growth is the norm, not the exception, in manufacturing. What is new about the manufacturing job crisis of the last four years is the sharp downturn in the ratio of domestic production to demand. While productivity growth has played a role in manufacturing job loss, rising trade deficits have been dismissed by far too many economists and policy makers. To be clear, the U.S. does not need all domestic demand to be satisfied only by domestic production, but it does need to move toward balance in manufactured imports and exports to keep from losing even more good paying manufacturing jobs.

For the United States to begin, as it must, to work its way out of its enormous trade deficit, it will require more employment in the manufacturing sector. The sooner, the better.

This week’s Snapshot was written by EPI economist L. Josh Bivens.