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
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