This article appears in the September 16, 2013, issue of National Review.
The decline of employment in the manufacturing sector has been one of the most reliable trends in the U.S. labor market for decades. From a high of over 19 million employees in 1979, manufacturing employment slid slowly to just over 17 million in 2000 and then fell to a low of 11.4 million in the first quarter of 2010, climbing back a bit to 11.98 million at the beginning of this year.
This decline has, of course, been driven by many factors. Automation has made it possible for U.S. manufacturers to massively increase the productivity of the workers they do employ. From 1979 to today, manufacturing output in the U.S. has increased from $1.25 trillion to $1.64 trillion in inflation-adjusted dollars, despite the decline in employment. In addition, workers have sensibly been drawn into employment in other sectors, such as software, where the U.S. has a significant comparative advantage.
Politicians of both parties have tended to bemoan the decline in manufacturing employment, treating it as a sign of failure. This observation itself is questionable, as a dollar earned designing software is just as valuable as a dollar earned in manufacturing, but the worst part of the conversation has been the blame game and the trade war it threatens. Listen to either party, and the entire swing is attributable to the evil actions of the currency-manipulating Chinese, who have apparently been running an organized-crime syndicate specializing in job theft.
To be sure, low-wage and labor-intensive manufacturing activities such as product assembly have shifted to China over the past few decades. Chinese workers were so numerous and so cheap that it was impossible for labor-intensive U.S. firms to compete. The latest research, however, suggests that the shift toward China is likely to be a much smaller story in the future.
While it is true that wages in China are still lower than those in the U.S., they are rising quickly. The nearby chart shows the average urban wage in China, as calculated in a recent article by Hongbin Li, Lei Li, Binzhen Wu, and Yanyan Xiong in the Journal of Economic Perspectives. In 1978, a typical Chinese manufacturing worker made $1,004 in inflation-adjusted dollars— a number that barely budged for almost 20 years. In 2010, he made $5,287. Although Chinese compensation would still look paltry to most American workers, it is much more costly to employ a Chinese worker today than it was in 1998—about five times as expensive.
This shift will affect the flow of manufacturing jobs for two main reasons. First, while Chinese labor is still cheaper than U.S. labor, the gap is closing rapidly and will continue to close. A manufacturer planning a new plant will have to factor future wages over the life of the plant into his calculus, and the U.S. will look increasingly attractive by that measure. Second, because of the recent sharp increase, Chinese wages are much higher than wages in countries such as Indonesia and Thailand. To the extent that labor-intensive U.S. activity is displaced by foreign production, it is much less likely that China will be seen as the culprit.
The rise of Chinese wages will, however, create one employment crisis in the U.S.: Politicians’ highly developed China-bashing skills may soon be obsolete.
-Kevin Hassett is the John G. Searle Senior Fellow and Director of Economic Policy Studies at AEI