Watts: Who Took What Jobs?

February 29, 2016

by Tyler Watts, Ph.D.

Demagogue politicians love to play on popular fears that low-wage foreigners are “stealing” good paying American jobs by way of outsourcing and globalization. The claim is made by nativists and protectionists of all political stripes, whether leftists complaining of a “rigged economy” or rightists speaking of other countries “beating” us economically.

A sound economic analysis of the claim about job losses due to international trade should address two questions: First, is it true that the U.S. has lost jobs due to trade (or other factors)? Second, is this phenomenon good or bad overall for the US and world economies?

On the first point, it can appear as though the U.S. has lost jobs. For example, manufacturing employment in the U.S. has declined by about 2 million from pre-Great Recession levels, and is down by over 7 million, or 37 percent, from the all-time high reached in 1979.

So indeed, the U.S. has been losing manufacturing jobs for decades, giving prima facie support to the demagogues’ arguments about the link between outsourcing and the so-called de-industrialization of America. But manufacturing is just part of an enormous U.S. economy. What do we observe when we look at employment in the entire economy?

First, we’ll note a painful loss of 8.7 million jobs from peak to trough of the latest recession (December 2007 to February 2010), a decline rivaled only by the Great Depression of the early 1930s. However, unlike the Great Depression, which took a full decade just to recover its loss of 10 million jobs, the latest recovery gained back the 8.7 million jobs in less than seven years, and has to date now added a net 5 million new jobs.

Payroll employment in the United States now stands at an all-time high of 143 million. Pundits and economists may argue that the rate of job growth has been weaker recently than prior economic recoveries, and perhaps that’s the case. I’m certainly not here to argue we live in the best of all possible worlds; I’m simply pointing out that there has by no means been a net reduction in employment in America, notwithstanding the big drop off in the manufacturing sector nor the massive recession we endured in 2008-2009.

The good news gets better, though: Not only have we gained jobs on net but jobs have grown faster than the population over time. Since the 1979 peak in manufacturing employment, the U.S. adult population grew by 53 percent, whereas employment grew by 59 percent.

So, broadly speaking, there are plenty of jobs out there to go around. Despite these generally positive facts, the demagogues will contend that we’ve replaced “good” manufacturing jobs with lousy service sector jobs. Well, of course, it must be true that, if we’ve lost manufacturing jobs but gained jobs overall, then all of the job gains must have come from non-manufacturing sectors. And indeed the service sector, broadly defined, has seen employment growth of 90 percent since our 1979 benchmark.

But beware making hasty earnings assumptions about a sector that employs nearly 124 million people. To see whether the newly created service-sector jobs really don’t pay as well as the vaunted manufacturing jobs, we need to drill down into the employment and earnings data. What we’ll find is that a large majority of the new service-sector jobs pay just as well or much better than manufacturing jobs.

This might come as a surprise to the anti-globalization crowd: despite the loss of 7 million manufacturing jobs (and some mining, logging and utilities-sector jobs), we’ve seen a net increase of nearly 53 million total jobs. Of these net new jobs, fully 62 percent of them feature, as of January 2016, average hourly earnings equal to or greater than current average hourly manufacturing earnings. In other words, most of the 53 million new jobs pay the same or better wages than the demagogues’ benchmark “good” manufacturing jobs. So we lost 7 million good jobs, only to gain about 32 million equal or better-paying jobs, along with about 19 million lower-paying jobs (about 38 percent of net new jobs pay less than manufacturing).

We’ve established that, despite a major decrease in employment in the manufacturing sector, we’ve gained many more jobs than we’ve lost in the past 35 years or so, and that most of these new jobs pay better to boot. Economic changes, while painful in the short run, have brought gains in output and employment not only for the U.S, but also for the rest of the world as well. Overall, this is good news for the US and world economies.

But the demagogues might still argue that, even though high-paying service sector jobs have more than replaced lost factory jobs, “we don’t make things here anymore” and we should lament this. This oft-heard refrain is patently false. We don’t make certain things, such as garments, toys or electronics, because global free trade and technological advances tend to shift America’s output into those industries in which our comparative advantage is greatest. But Americans do indeed make things, quite valuable things.

The U.S. Industrial Production Index for the de-industrialization period shows that after the expected steep decline following the Great Recession of 2008-2009, U.S. manufacturing has slowly bounced back and is now producing more products, in value-added terms, than ever before. Indeed, this index, which consists mainly of manufacturing, has grown by over 100 percent since the 1979 peak in manufacturing employment.

From an economic perspective, nothing could be better news. U.S. manufacturing creates 100 percent more value with 37 percent fewer workers. Creating more value with fewer workers means we’re more efficient than ever, or put another way, more productive than ever. These awesome productivity gains have many sources, especially in the form of technological advances in areas like software, robotics, and communications. Globalization and outsourcing have also played a role, as they allow American workers a greater degree of specialization in those sectors where our productivity edge is largest. Regardless of the relative importance of technology vs. outsourcing in driving these changes, the broader point still stands: the U.S. economy is both more productive and has more job opportunities than ever before.

As the campaign season heats up, let’s not be misled by baseless arguments about America “losing” jobs or other countries “beating” us at trade. It is a positive-sum game, and the benefits for both the U.S. and world economies are, shall we say, “yuge.”

Tyler Watts, Ph.D., an adjunct scholar of the Indiana Policy Review Foundation, formerly taught economics at Ball State University. He now directs the Institute for Economic Education at East Texas Baptist University.


Figure 2: Population Growth vs. Employment Growth since 1979; Source: Federal Reserve Economic Data.

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