February 1, 2004

Manufacturing Employment, Productivity and the Business Cycle

Download Background Paper No. 42

Background Paper No. 42

Executive SummaryA new Tax Foundation study examines the decline of manufacturing employment, questions the data used to calculate job losses and casts doubt on some popular protectionist responses that legislators and pundits have offered.

Professor John Tatom of DePaul University and Visiting Scholar with the Tax Foundation is the author of “Manufacturing Employment, Productivity and the Business Cycle,” No. 42 in the Tax Foundation Background Paper series.

Tatom comments that the U.S. manufacturing sector has become the poster child of the “jobless recovery,” portrayed by columnists and politicians as the latest victim of the Bubble Economy. Current survey data shows that manufacturing employment has fallen 2.6 million since the last recession began in March 2001, accounting for the lion’s share of the 2.7 million decline in payroll employment from March 2001 to its trough in August 2003. The overall decline in manufacturing employment has actually been even larger, 3.0 million, because it began in July 2000, eight months before the recession began.

The Bush administration has certainly been responsive to manufacturers’ concerns, notably by imposing steel tariffs despite the evidence that they hurt U.S. manufacturing and employment overall. Demands for a broader application of similar protectionist policies are widespread.

Tatom reminds policymakers that pundits are always looking for a new whipping boy to symbolize U.S. economic decline. In the mid-1980s it was the “deindustrialization of America.” Ironically, when the U.S. was supposedly threatened with becoming a nation of hamburger flippers, the manufacturing sector and the economy as a whole were enjoying a surge of economic growth.

Tatom believes the danger of more damaging protectionist measures is greater now than it was during the 1980s. A large current account deficit has remained in the face of an economic expansion. As with the recession in the early 1990s, current payroll survey data shows little overall employment growth, with losses heavily concentrated in manufacturing.

Tatom offers a more patient and optimistic perspective, reflecting on rapid productivity growth and pointing out that payroll survey data after the last recession were eventually revised to show significant job growth.

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