Everybody knows that the decline in manufacturing employment is due to the adoption of new technologies making us more productive, not jobs moving offshore. Sadly, “everybody” was wrong and we made some stupid policy choices. Here’s the research.

Between 2000 and 2010, manufacturing employment plummeted by more than a third. Nearly 6 million American factory workers lost their jobs! The drop was unprecedented—worse than any decade in US manufacturing history. Even during the Great Depression, factory jobs shrunk by only 31%, according to an Information Technology & Innovation Foundation report. Though the sector recovered slightly since then, America’s manufacturing workforce is still more than 26% smaller than it was in 2000.

But, at the same time it “appeared” that our factories were making more stuff than ever. How could that be? Why of course, our technology must be making us super productive. Really? How do you explain that between 2000 and 2014 78,000 manufacturing plants closed? Even robots have to work somewhere. Worse yet, the U.S. is not even the leader in the adoption of robots for manufacturing. We are just middle of the pack.

Seems odd doesn’t it. Susan Houseman, a researcher at the Upjohn Institute was troubled by this as well and started digging into it. Here’s what she and her colleagues discovered: the way government economists treated manufacturing statistics unwittingly gave the computer sector a huge weighting in productivity growth. A weight so large that it was swamping all the other sectors and making it appear as if all of manufacturing was increasingly productive.

She published these finding in 2011 but they went largely unnoticed. The conventional wisdom that automation caused manufacturing job losses continued. Our infatuation with computers, electronic gadgets and similar shiny things seduced and blinded government, academe, journalists and all the elites to the truth that was being felt on the ground: lay-offs, shuttered factories and the hollowing out of America’s middle class.

Houseman did not give up and dug deeper. The results were staggering. If you looked at all of manufacturing except for computers, productivity was only increasing 0.2% per year throughout the 2000’s. Worse, overall productivity for all these non-computer sectors was actually lower in 2016 than in 2007!

When you consider Houseman’s work lots of things start to make sense. First, why have wages stagnated? Reason: real productivity growth, which drives wage growth, has plateaued. Productivity in the service economy – our largest part of GDP – is naturally difficult to raise because of its human capital intensity (See Baumol’s Cost Disease). That stalls a big part of the economy. Now toss in: we now know that for most of the manufacturing sector there has been little or no productivity increase and the driver behind flat and declining wages is clear.

Next, where did income inequality come from? Our policies created it. A Pew Research study revealed: in 1971, about 61 percent of adults lived in middle-income households. By 2014, that share had dropped to 50 percent. Meanwhile, the share of low-income households grew from 25 percent to 29 percent.

That middle class did not lose their jobs and fall back in their lifestyle due to automation. They lost their jobs because the jobs went to low wage countries like Mexico and China. They were literally shipped out of the country. Especially to China who was allowed to not only leverage its low cost labor but play it’s own mercantilist policy even while being part of a supposed level playing field in the WTO.

Lastly, why are we surprised at the rise of nationalists in the US and Europe? Our misguided, technocratic illusion fostered policies that created a disenchanted and increasingly poorer middle class. Why would they ever vote for the very people that did this to them?

But perhaps we are watching our democracy actually correcting the problem. While few like the comportment of the current administration, it has explicitly recognized the issue and is tackling the underlying causes directly, especially with respect to China. Thomas Friedman’s (definitely not a big fan of this administration) recent New York Times editorial analyzes the recent meetings between US and Chinese officials over trade and points out that action sooner would have been better, but that now we must act before it’s too late.

None of this will be easy, or happen quickly. Decades of flawed policies don’t get fixed overnight. Complicating matters is that many still cling to the disproven conventional wisdom. Word gets out slowly plus, wouldn’t you resist if change threatened what made you well off? Yes, while the middle class shrunk and the lower class grew, the upper class that subscribed to automation myth is doing just fine.

Why Care? Aristotle said it more than 2,300 years ago. “Great then is the good fortune of a state in which the citizens have a moderate and sufficient property; for where some possess much, and the others nothing…a tyranny may grow out of either extreme. Where the middle class is large, there are least likely to be factions and dissensions.”

Special thanks to Gwynn Guilford for her excellent article in Quartz. It is the source for much of this post. For a deeper dive on all the stats and research I encourage you to read her piece.

Share This