Monday, May 23, 2011

Decreases in Manufacturing's Share of GDP and Employment Are a Result of Increasing Productivity

From Paul Krugman's book "Pop Internationalism" (updated, original source):

"Between 1970 and 1990 manufacturing declined from 25.0 to 18.4 percent of GDP. International trade explains only a small part of the decline in the relative importance of manufacturing to the economy. Why then has the share of manufacturing declined?   

The immediate reason is that the composition of domestic spending has shifted away from manufactured goods. In 1970, U.S. residents spent 46 percent of their outlays on goods (manufactured, grown, or mined) and 54 percent on services and construction. By 1991, the shares were 40.7 percent and 59.3 percent respectively, as people began spending comparatively more on, for example, health care, travel, entertainment, legal services, fast food and so on.  It is hardly surprising, given this shift, that manufacturing has become a less important part of the economy.

In particular, U.S. residents are spending a smaller fraction of their incomes on goods than they did 20 years ago for a simple reason: goods have become relatively cheaper.  Between 1970 and 1990 the price of goods relative to services fell 22.9% percent.  Goods have become cheaper primarily because productivity in manufacturing has grown much faster than in services.  The growth has been passed on in lower consumer prices.  

Ironically, the conventional wisdom here has things almost exactly backward. Policymakers often ascribe the declining share of industrial employment to a lack of manufacturing competitiveness brought on by inadequate productivity growth. In fact, the shrinkage is largely the result of high productivity growth, at least as compared with the service sector. The concern that industrial workers would lose their jobs because of automation is closer to the truth than the preoccupation with a presumed loss of manufacturing because of foreign competition."

MP: The chart above shows the incredible increases in U.S. manufacturing productivity, which has made American manufacturing increasingly more efficient and more competitive, leading to lower prices for manufactured goods.  Because the productivity gains for manufacturing have exceeded productivity gains for services-producing industries, the prices for manufactured goods have fallen relative to prices for services, which had led to decreases (increases) in manufacturing's (service's) share of GDP and employment.  

HT: James E. Miller's post "The Good Krugman

Update: Log scale graph appears below:


At 5/23/2011 7:23 PM, Blogger NormanB said...

For a graph of this duration and change a semi-log plot would be much more instructive.

At 5/23/2011 8:09 PM, Blogger Buddy R Pacifico said...

Very high productivity, per worker, is a high value reason to manufacture in the USA.

At 5/23/2011 11:36 PM, Blogger Javier Vega Cifuentes said...

this is a good theory The Analysis: Return to "Made in USA"

At 5/24/2011 8:49 AM, Blogger PeakTrader said...

Manufacturing output per worker likely increased mostly from a combination of changes in demographics, lower interest rates, and more international trade.

Manufacturing output per worker rose less in the 1965-82 bear market than the 1982-00 bull market. Yet, it rose at a much steeper rate after another bear market began in 2000.

The Baby-Boomers (born between 1946-64) began to enter their peak productive years in 1982, which coincided with falling interest rates (reducing the cost of capital goods), while international trade and offshoring accelerated.

In the 2000s, U.S. manufacturing was producing higher value goods (including goods with market power), after offshoring lower value goods, while demographics (including from fewer workers) remained strong, and interest rates remained low.

At 5/24/2011 2:36 PM, Blogger Rufus II said...

Get more productive, or live like a Chinaman. Simple, really.

At 5/24/2011 4:11 PM, Anonymous Anonymous said...

Rufus II:

It's possible to work smarter but not harder, so you don't have to work like a Chinaman to live better than he does. You just have to think before you act.

In the "old" days, jobs were brought into the factories and then the number of workers to run the job would be determined. Now the number of people to run the job is determined before the job comes into the factory. It's much more difficult to engineer people out of the process in the factory than it is to design fewer people into the process before the factory.

Fewer but better jobs is the ultimate result. Jobs that buy stuff from you so more people can make a living. U.S. manufacturing is not dead--it has evolved.

Don't count out U.S. workers to get the job done.


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