History Lessons: Understanding the Decline in Manufacturing

Article excerpt

New ideas for reviving American manufacturing seem to appear every day. Many of these notions have merit, but most are built on a flawed premise: that the decline in U.S. factory jobs is a recent occurrence, one that can be reversed through tax cuts or trade policy.

Unfortunately, U.S. industrial decline is a long-run phenomenon and will not be reversed by short-term fixes. Let's take a look at the trends and their implications.

The really long run

Economists traditionally classify economic activity into three sectors: agriculture (including forestry and fishing), industry (including mining, construction, and manufacturing) and services (all activities not included in either agriculture or industry.)

You probably have a story in mind about what these data will tell us. The United States was primarily an agricultural economy through the 19th century; then, industry swept the landscape in the late- 19th and early 20th century -- with America standing as the industrial powerhouse of the world by the 1950s. Things stayed this way until the late-1970s and 1980s, when we first lost our edge to the Japanese, then to the Chinese, and have now become a service economy that doesn't produce stuff.

This story isn't quite right. Let's start with where people worked. The graph below shows the distribution of the labor force in agriculture, industry and services from 1840 to the present. The part of the story about agriculture is clearly true: Beginning in 1840 at roughly 70 percent of the labor force, agricultural employment fell to about 40 percent in 1900, 10 percent in 1950, and remains at about 2 percent today.

Next, let's examine the service sector. Here's where the surprises begin. In terms of employment, the second largest sector was services, not industry. In fact, service employment exceeded industrial employment throughout American history. Looking at industry, the closest that sector got to services was in 1880!

A similar story emerges when we look at output produced in agriculture, industry and services. Again, the agricultural sector originally accounted for the largest share of output, but services caught up and exceeded agriculture by the 1880s.

Industrial production kept pace until 1910, but after that services pulled ahead and never looked back. Since 1950, the share of output produced in industry has steadily declined, falling from about 40 percent of output to about 25 percent today.

The story since World War II

Let's zero in on the period since World War II. To keep things focused, I'll make three changes to our perspective. First, some might argue that the rise in service employment and output shown above is caused by the growth of government. I'll focus on private- sector employment and output to see if increasing service employment and output is a product of expanded government or is the result of private-sector changes. Second, I'll combine agriculture and industry into one goods-producing sector, and then compare that with services. …

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