#538. The Myth and the Reality of Manufacturing in America

The Center for Business and Economic Research at Ball State University in Muncie, Indiana, recently released their report The Myth and Reality of Manufacturing in America, which examines the conditions surrounding the industry before and after the Great Recession. Below is the summary from the report:

The Myth and the Reality of Manufacturing in America

Manufacturing has continued to grow, and the sector itself remains a large, important, and growing sector of the U.S. economy. Employment in manufacturing has stagnated for some time, primarily due to growth in productivity of manufacturing production processes.

Three factors have contributed to changes in manufacturing employment in recent years: Productivity, trade, and domestic demand. Overwhelmingly, the largest impact is productivity. Almost 88 percent of job losses in manufacturing in recent years can be attributable to productivity growth, and the long-term changes to manufacturing employment are mostly linked to the productivity of American factories. Growing demand for manufacturing goods in the U.S. has offset some of those job losses, but the effect is modest, accounting for a 1.2 percent increase in jobs beyond what we would expect if consumer demand for domestically manufactured goods was flat.

Exports lead to higher levels of domestic production and employment, while imports reduce domestic production and employment. The difference between these, or net exports, has been negative since 1980, and has contributed to roughly 13.4 percent of job losses in the U.S. in the last decade. Our estimate is almost exactly that reported by the more respected research centers in the nation.

Manufacturing production remains robust. Productivity growth is the largest contributor to job displacement over the past several decades. This leads to a domestic policy consideration.

Several analysts have made recommendations regarding manufacturing promotion.

Exchange rates clearly play a part of the role of manufacturing import substitution and employment displacement. Any nonmarket factor which influences dollar valuation should be diligently opposed by international trade agencies and agreements.

U.S. national corporate income tax rates are the highest of the OECD nations, and clearly impose a disincentive for transnational corporate location in the U.S. The government should consider lowering barriers to headquarter and manufacturing facility location through a reduction of federal corporate tax rates.

Sustainable manufacturing employment growth requires high levels of human capital. The nation and individual states should actively support education reforms at the secondary and tertiary level that prepare students for employment opportunities in manufacturing, which will be large due to job turnover among the baby boom share of the manufacturing labor force. Human capital interventions should also begin at the pre-K level, focusing on skills that enable acquisition of the mathematical and cognitive skills required of the modern manufacturing workforce.

This report provides further evidence to a fact that we have long known: American manufacturing workers are the most productive in the world. We expect productivity to continue to increase, therefore, in order to add jobs, we must open up trade avenues and grow our human capital base with the skills necessary for today’s (and tomorrow’s) manufacturing jobs.

Full report