Deindustrialization of the U.S. Economy: The Roles of Trade, Productivity, and Recession

Publication Date: April 2004

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Economics

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Abstract:

Manufacturing seems to be a steadily diminishing presence in the American economy, producing a falling share of Gross National Product and employing a smaller share of the labor force. Many see this as a loss of something vital to providing "good" jobs and advancing economic well being. On the other hand, deindustrialization has occurred in varying degrees in most industrial economies and can be seen as a natural outcome of economic progress and a rising living standard. When examined from the standpoint of real output and level of employment, the U.S. manufacturing sector has shown considerable stability over the last 20 years. Because the apparent deindustrialization has been coincident with a rising level of international trade, particularly recent increases in trade with many low-wage, developing economies, there is an inclination to see causality running from rising trade to a faltering manufacturing sector. Yet economic analysis indicates that while a rising level of trade can have adverse consequences for particular industries, it is unlikely to adversely affect the whole manufacturing sector. Increased imports may hurt some industries, but the increased exports needed to pay for those imports helps other industries. Therefore, across all tradeable goods producing industries there is no net loss of jobs. Moreover, exporting industries tend to pay higher wages than import competing industries.

Rising trade deficits are a somewhat different matter. Trade deficits are not a function of a rising level of trade. They are largely rooted in domestic macroeconomic forces that affect domestic saving and investment decisions, including the government budget. Trade deficits do not lead to any net loss of output or jobs for the economy, but they will likely change the composition of output and employment between tradeable and non-tradeable goods. It is very likely that the manufacturing sector, which produces tradeable goods, will be adversely affected by large and growing trade deficits, although that effect is probably not as large as commonly believed.

An economic force that has clearly had a strong impact on manufacturing is a steady and often rapid rise in sector productivity. The impact of productivity on sector employment is far larger then the effect of trade deficits. In the past, productivity rise has allowed the manufacturing sector to expand output with a fairly steady level of employment. Recent acceleration of the pace of productivity advance raises the possibility that in the future, efficiency gains may outpace output growth and lead to significantly slower growth of sector employment.

A policy response that would have a direct positive economic effect on the manufacturing sector is action toward reducing the trade deficit. An indirect policy response would be, to raise the pace of development of new technology and new products through added support for areas of idea creation that the private market will insufficiently support. There will still be need to ameliorate the destructive aspect of economic progress. If workers now must face an increasingly volatile labor market, more support may be needed for programs to ease the disruption workers face and facilitate their adjustment to new jobs. This report will not be updated.