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.