January 22, 2011

The Increase in U.S. Manufacturing Jobs Is Nothing to Cheer About

A recent article in The Wall Street Journal pointed to an uptick in manufacturing jobs in the United States as a glimmer of hope in the depressing job picture. The increase — the first in a decade — is certainly an encouraging sign. Manufacturing jobs could, indeed, rise over the next 5 to 10 years, perhaps even at the 2% annual rate predicted by some of the economists quoted in the article. But that won't get us back to the long-term level that prevailed until 2000. Meanwhile, there are reasons to be concerned about the sector of the economy that has been the real job creator for decades: namely, services.

The recent job losses in manufacturing took place in two stages. The first, the loss of about 3 million jobs in 2000-01, was the steepest in 50 years. And unlike past slumps, the number did not bounce back to the 17 million to 18 million that's been the norm since the late 1960s.

The reason can be summarized in one word: China. Almost no sector has been immune from China's manufacturing expansion, and U.S. firms themselves have been forced to move jobs abroad to survive the low-cost competition. After 2002, the decline in U.S. manufacturing jobs continued at a slower rate into 2007, with another million or so jobs lost.

Then came the 2007 recession and worldwide financial and economic crisis. World manufacturing output dropped, and employment everywhere took a hit. In the U.S., another 2 million manufacturing jobs were lost after 2008.

What does all this imply about the future for U.S. manufacturing employment? The 4 million jobs lost before 2008 will probably never come back.

How about the 2 million lost after 2008? As the world economy recovers, U.S. manufacturing exports might indeed gain back some ground, perhaps even helped by a weak dollar. So a 2% increase over a decade, which would generate a million jobs, could happen. But will we get all 2 million back? I'm not optimistic.

But the biggest cause for concern is what's happening in services. Unlike manufacturing jobs, service jobs in the U.S. have shown an amazingly steady rate of growth since the late 1960s. After every recession, job creation in services always recovered and at a rate higher than before. From the early 1980s into 2000, service jobs grew at about 2.5 million a year except in recession years.

This situation has changed. After the 2001 recession, the rate of growth was lower than before the recession. From 2001 to 2010, some 20 million service jobs that could have been expected to materialize based on historical rates did not. It could well be that the rate of job creation in services has now permanently slowed from the rate in the two decades preceding 2001.


Job growth has slowed significantly in the financial- and business-services sectors due to technology-driven service industrialization (automation, outsourcing, off-shoring, process re-engineering, and self-service).

Employment in the wholesale and retail trade also is slowing down; industrialization (in the form of e-commerce and online retailing) is undoubtedly one reason.

My guess is jobs in the hospitality and leisure industries, which took a hit in the Great Recession, will recover but slowly, since they are driven by consumer spending.

Education and health are about the only substantial service-sector employers where the jobs outlook is bright. They are not seriously affected by recessions and continue to show impressive rates of job creation. Technology will affect them, but the impact will take longer and may be less deep than other areas.

The real problem, of course, is not the number of jobs in the U.S. but the number of unemployed. Since 1980, the civilian workforce in the U.S. has grown almost linearly since 1980 at a rate of about 1.67 million per year. But this rate abruptly flattens out after 2007 — largely because the retirement of the baby boomers is offsetting the growth in the workforce due to the increase in the population (including immigration). If that remains the case, then in a few years, there may be jobs that go begging.

But if those jobs require levels of education and training that job seekers lack, unemployment could still remain fairly high.

Now you can see why I don't think the slight uptick in manufacturing jobs is a cause for celebration.

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