Mitchell’s Musings 5-30-16: What Was Missing

29 May 2016 8:03 AM | Daniel Mitchell (Administrator)

Mitchell’s Musings 5-30-16: What Was Missing


Daniel J.B. Mitchell


I recently attended the LERA (Labor and Employment Relations Association) meetings in Minneapolis. LERA is the organization that sponsors the EPRN website on which this column appears. Confession: I was on the program committee that helped develop the meeting’s agenda. But as I attended sessions and heard speakers, there was a missing element. Maybe that is my fault.


There was some mention of the current presidential campaign. However, back when the program was being planned, no one – except maybe Donald Trump and Bernie Sanders (neither of which was on the program committee – could have foreseen how the campaign would evolve. And one way in which it did in fact evolve was candidate discussion of the loss of “good” American manufacturing jobs due to globalization.


I attended one session on the auto industry – domestic and transplant/foreign - and its shift of facilities to Mexico. However, that session was mainly descriptive (but very interesting). Another interesting panel discussed the incorporation of labor standards into trade agreements such as the currently-pending TPP. Some of the sessions were run simultaneously so I can’t say what happened in all of them pertaining to trade and jobs. And I wasn’t at the last two days of the conference so maybe the omission I am alluding to - exchange rates – was somewhere on the later program after all.

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Let’s have some background. The chart above provides a summary, from the perspective of national income accounting, of the long-term slide of manufacturing relative to overall U.S. economic activity. Back in the 1950s, manufacturing accounted for 30+ percent of American total activity, as depicted on the chart. Nowadays, the share is 10+ percent. That’s a big slide. What caused it?[1]


The two main causes of choice for the slide in the literature have been technology (rising productivity so fewer workers are needed) and globalization (jobs being outsourced abroad via imports plus competition with U.S. exports). As a quick experiment, I rewrote history on the chart below by assuming that the goods trade balance had been zero (rather than negative over much of the period) and further assumed that all the extra activity generated came from U.S. manufacturing. (Not all goods by any means are manufactured so the latter assumption in particular is extreme.) Making those assumptions reduced the relative decline of manufacturing. Instead of going from 30+ percent to 10+ percent, it went from 30+ to 15+. That’s not nothing in terms of a reduction, but it does suggest that a lot of the reduction was due to some combination of technology and change in demand toward non-manufacturing (including services).

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On the other hand, the shift in the current endpoint from 10+ to 15+ isn’t negligible. That’s roughly a one third increase in manufacturing activity (and presumably jobs) from what we have today. Of course, I made extreme assumptions to get to that third. Nonetheless, it does suggest that different trade arrangements could have a significant impact on the number of manufacturing jobs and the size of that sector.


It’s hard, however, to see how a revision of labor standards clauses in trade agreements would have much effect. The LERA panel on standards previously mentioned concluded as much. And as long as there are no effective limits on exchange rate manipulation, it’s hard to see that trade agreements that ostensibly reduce foreign trade barriers to American exports will have much effect. Such arrangements are more likely to increase both exports and imports and leave the balance between the two largely unchanged.


Exchange rates are tough to negotiate about because the definition of “manipulation” is bound to be unclear in practice. Were the U.S. to take unilateral action on exchange rates (as the Nixon administration did in 1971 and 1973 when then-existing fixed rates were abandoned), such defensive responses might be ruled by some tribunal to be manipulation. Put another way, if the U.S. were to take such actions, having treaties with provisions ostensibly dealing with the topic might be a hindrance.


Addressing the exchange rate issue, if it were done by the U.S., won’t change the advance of technology and the shift in demand toward non-manufacturing activities. We are not going back to the 1950s with 30+ percent of activity in manufacturing. But it could have a significant effect in creating more manufacturing jobs. And it would surely have more effect than the indirect remedies that are often suggested such as providing better training and education. Such provision may be important in its own right. But it is a palliative when it comes to jobs-trade-exchange rates.

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[1] As the chart shows, the switch from the SIC definition of manufacturing to the NAICS definition knocks about a percentage point from the total.


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