Is China driving the wrong kind of structural change in the U.S.?

By Maggie McMillan, guest blogger

When economists talk about structural transformation, they typically have in mind developing countries and the dual economy models à la W. Arthur Lewis that emphasize productivity differentials between broad sectors of the economy, such as agriculture and manufacturing. They don't usually think about countries like the United States where this type of transformation has already taken place. But the figure below indicates that it is something we should be thinking about. The horizontal axis shows that between 1998 and 2007, the share of the labor force in manufacturing fell by around 3%. The share of the labor force in services (cspsgs) increased by a little more than two percent. The problem with this is that labor productivity in services is lower than economywide productivity (vertical axis) so this sectoral shift in employment lowers economywide productivity. Note that these changes took place before the Great Recession (the picture looks much worse for the period 1998 to 2009).

Note: Abbreviations are as follows: (agr) Agriculture; (min) Mining; (mfg) Manufacturing; (pu) Public Utilities; (con) Construction; (wrt) Retail and Wholesale Trade; (tsc) Transport and Communication; (fire) Finance and Business Services; (cspsgs) Community, Social, Personal and Government Services.

The cost of this transformation has not been well understood. For example, one often hears that the loss of jobs in manufacturing is no big deal because productivity in manufacturing is increasing and this will drive growth. But this argument ignores the economywide effects of labor reallocation. Another argument that is often heard is that we don't need to worry about losing jobs in manufacturing because jobs in professional and business services are growing. But average labor productivity in professional and business services (not shown separately) is lower than average labor productivity in manufacturing. Using the March version of the Current Population Survey which follows workers over time, Ebenstein et al ( http://pluto.huji.ac.il/~ebenstein/) show that the majority of workers who leave manufacturing end up in the service sector where their wages are between 3 and 11 percent lower.

The key question is: what is driving this pattern? I don't have an airtight identification strategy but I have a hunch that it has something to do with China. Here's why. Between 1998 and 2007, offshore employment to China by U.S. based manufacturing firms increased from around 100,000 to around 600,000 or roughly 500 percent. In 2008, China held more U.S. affiliate jobs than any other country in the world. This is a first - affiliate activity has typically been concentrated in high income countries. Over this same period, manufacturing employment in the U.S. contracted sharply. But the smoking gun lies in the figure below. It shows a strong negative correlation by sector between manufacturing employment in China and manufacturing employment in the United States. It seems highly unlikely that this pattern is driven by labor-saving technological change in the U.S. I guess it could be driven by underlying changes in demand, but I doubt it.

Comments

[Mcz Fea]

I was wondering if this argument [1] can be used to make a case that the productivity gap between industry and service will increase in the future...

[1] http://marginalrevolution.com/marginalrevolution/2011/06/is-information-technology-a-general-purpose-technology.html

[Kimmitt]

It's an unexamined assumption that this pattern began in 1998. What if it began in the 70s? Then China's rise is just another link in the chain.

[Kimmitt]

In particular, I'm referring to the famous productivity slowdown in the 70s and 80s attributed to, among many other things, the rise of the EPA and OSHA.

[21tigermike]

The next step for the US is not getting manufacturing bases back from the Chinese via tarriffs, etc, but educating its workforce that seems so distraught over the loss of these low-paying jobs.

How much is Harvard? 200,000 for a 4 year stint? That's comtemptable. Thankfully, unlike the US health care system, there are great options for Americans to get educated. So why are so many crying over the loss of manufacturing jobs?

[Alf Hickey]

Where are you getting the stats about off shoring to China from? I'd like to see what sectors the change is coming from.

I'm not that convinced by your smoking gun graph. What are the dates on the data points? The correlation could just represent offset business cycles. China was in a slump 98-99 because of the Asian financial crisis, while the US was at the peak of a boom. After that the bubble popped and was followed by a jobless recovery, while the Chinese economy expanded non stop.

Not that I don't think Chinese manufacturing policy has nothing to do with employment in the states, I don't think that chart necessarily shows it though.

[Youcef Msaid]

The graph about China is not convincing at all. You are looking at variation over time, so time trends where the US sector is trending down while the Chinese is trending up would easily generate such a strong correlation. I am actually a bit surprised it is not stronger (it must have to do with business cycles).

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show that the majority of workers who leave manufacturing end up in the service sector where their wages are between 3 and 11 percent lower.

I have somewhat of an issue with this statement. There are lots of people in the service sector that are making very good wages. Are we talking about HVAC mechanics, electricians,etc; or customer service agents working for IT companies etc; ???

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I think a model like Germany where the workers are on the board at companies steer a much different and better course of development than the top down American approach.The whole dialogue about education becomes much richer and diverse and skills focused. Much de industrialization happened in the 70's according to Bluestone and Harrison, 37million or so jobs were lost according to their study. Flippin' burgers may not be the worst thing in the world in a culture that rebels against education IF you have very affordable health care and housing ,I guess.

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