Imports and U.S. Manufacturing Jobs

A recent analysis by Economy.com finds that from 2000 to 2002, a rising tide of manufactured imports cost the U.S. economy 1.1 million actual and potential jobs. The decline in manufacturing jobs is causing concern within political circles in Washington, D.C., and is prompting demands from industry for protection from imports. However, restricting imports is not the answer. Rather, policy should focus on increasing the skill level of U.S. work force through education and re-training.

It is true that U.S. manufacturing has taken a beating during the recent downturn. Overall, U.S. manufacturing has lost 2.7 million jobs since July 2000. Economy-wide, the job loss was 2.1 million, implying that other industries gained 623,000 jobs during this same period. This deep decline in manufacturing jobs is not unprecedented. From June 1979 to December 1982, the manufacturing sector lost 2.9 million jobs, out of which more than one-half were never recovered.

According to Economy.com, there are three simultaneous forces at work behind the decline in employment. First, there is a long-term secular trend brought about by gains in labor productivity. As labor productivity rises due to innovation, less labor is required to produce the same amount of output.

Second, there is a cyclical component in the decline of jobs. After the IT bubble burst, a large number of companies shut down and an increasing number of workers found themselves without jobs. Inter-industry linkages caused a cascading impact across the country resulting in higher unemployment throughout.

Finally, the unrelenting spread of globalization, and the incessant pressures to reduce costs, forces firms to relocate production facilities to countries which offer a more competitive environment, or to outsource production to a foreign company altogether. Another reason for relocation to a foreign site could be that the foreign market has become sufficiently large that establishing a factory there makes more economic sense than exporting to there from the U.S.

What should we do to respond to this situation? A knee-jerk reaction to such large losses in manufacturing jobs would be to call for protectionist measures. However, erecting walls around manufacturing industries will only hurt them over the long haul by neutralizing an important source of pressure to innovate and improve productivity—a good example being the steel industry. Besides, denial of cheaper manufactured imports will hurt consumers by reducing the amount of disposable income available for other goods and services.

The Economy.com analysis finds that the bulk of manufacturing jobs lost have been in industries which add much less value than the average. The output per full-time equivalent employee in textiles and apparel, which lost almost one-third of its jobs, 324,000, since 2000, is less than one-half of the manufacturing sector as a whole. These low-skill, low-value-added jobs will naturally move to areas where there are plenty of low-skilled workers available for lower wages.

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