Hoover Daily Report

The Case for a Dynamic Economy

Monday, September 22, 2003

Many people worry that the decline in U.S. manufacturing employment is a sign of U.S. economic decline. That worry is understandable, but a closer look shows that the loss of manufacturing jobs is a sign of economic health.

Here are the facts. In July of this year, 14.6 million Americans were employed in manufacturing. This is a 17 percent decline from the peak of 17.6 million in March 1998. But over that same period, manufacturing output actually grew slightly, even with a recession in between. How could that be? Simple. Productivity in manufacturing—output per worker—grew substantially. In other words, we are making more goods with fewer workers.

Isn't manufacturing falling as a share of gross domestic product (GDP)? Yes. And, as my Hoover colleague Robert Hall pointed out in recent congressional testimony, it has been falling fairly steadily since 1947. The reason is that the tremendous productivity growth in manufacturing has caused prices of manufactured goods to fall relative to prices of health care, education, and other services. So even though manufacturing output has risen, GDP accounts value this output at market prices, which have been falling. You are not worse off because you can buy two televisions for the same amount (inflation adjusted), that you would have paid for one lower-quality television twenty years ago. You are better off. In fact, the declining prices of manufactured goods are one of the main reasons per capita income and wealth have grown so much since World War II.

One consequence of increased productivity, of course, is loss of manufacturing jobs. That is a hardship for workers who were previously employed in manufacturing. But they find work elsewhere. In other words, they produce other goods or services that help increase our standard of living. The only way to prevent the loss of manufacturing jobs is to impose draconian restrictions that bind workers to manufacturing and make productivity growth illegal. Besides reducing our freedom, such restrictions would also freeze our standard of living. The history of economic growth is the history of people making more with less and shifting into new jobs that were unheard of in the previous generation. Because Henry Ford produced millions of cars on assembly lines, workers producing buggies lost their jobs. And, ten years later, most of them were probably glad they did.

Of course, some of the job loss is due to the fact that we buy goods from China and other low-wage countries. But that is just another way of saying that we have better uses for our labor here. If you take your clothes to a dry cleaner, you "lose the job" of cleaning your clothes at home. And you'll take that loss every day—the time you free up is better used in leisure activities or in working more. Similarly, we are better off buying mass-produced, low-wage goods from China and producing high-end services and intellectual property here in the United States.

The decline in manufacturing jobs, whether due to higher productivity or freer trade, is a boon to Americans.