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What Accounts for the Decline in Manufacturing Employment 1 (February 2004)

handle is hein.congrec/cbo9519 and id is 1 raw text is: A series of issue summaries from the Congressional Budget Office FEBRUARY 18, 2004 What Accounts for the Decline in Manufacturing Employment? Summary The manufacturing sector of the U.S. economy has expe- rienced substantial job losses over the past several years. In January 2004, the number of such jobs stood at 14.3 million, down by 3.0 million jobs, or 17.5 percent, since July 2000 and about 5.2 million since the historical peak in 1979. Employment in manufacturing was its lowest since July 1950 (see Figure 1). Much of the decline in manufacturing employment since 2000 reflects the recession that began in 2001 and the rel- atively weak recovery in demand that followed. The re- cession was particularly hard on the manufacturing sec- tor, as the demand for goods weakened in both the United States and the rest of the world. Those cyclical losses in manufacturing employment persisted through the first two years of the recovery, but they are likely to be at least partially reversed as the economy expands in the next few years. However, long-term trends indicate that even after the economy has fully recovered from the 2001 recession, employment in manufacturing is unlikely to return to its prerecession level. Over the long term, productivity in manufacturing has increased at a consistently strong pace, so sales would have needed to expand even faster for em- ployment to show any gains. But the growth in demand for manufactured goods has not kept pace with the growth in productivity, as consumers continue to devote more of their spending to services instead of goods. In ad- dition, U.S. manufacturers have faced competition from countries where businesses face lower compensation costs. Finally, the downward trend is in part a statistical artifact: manufacturers are increasingly using contract and temporary labor, which provides jobs that, in the past, would have shown up in the statistics as manufac- turing employment but now do not. The loss of manufacturing jobs is a burden for affected workers but should not have a lasting effect on employ- ment in the economy as a whole. The labor market in the United States is quite flexible, so even if gains in produc- tivity, shifts in demand, or increasing international com- petition bring about permanent job losses in manufactur- ing, the effect on aggregate employment is not permanent, lasting only through a period of adjustment during which displaced workers obtain other employ- ment (albeit in many cases in less desirable jobs). Figure 1. Manufacturing Employment (Millions of jobs) 20r n I . I . I I . 1 . I I 1950 1960 1970 1980 1990 2000 Sources: Congressional Budget Office; Department of Labor, Bureau of Labor Statistics. Note: The vertical bars indicate periods of recession as defined by the National Bureau of Economic Research.

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