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While U.S. manufacturing output has continued to rise over recent decades, manufacturing employment has not. According to the Bureau of Labor Statistics, U.S. manufacturing employment fell from roughly 20 million in 1979 to 14 million in 2007 with more than half of that decline coming since the start of the 2001 mini-recession.
And when you dig into those numbers, you find a mystery. As Fed economist Justin Pierce and Yale economist Peter Schott point out in a new paper, “The Surprisingly Swift Decline of U.S. Manufacturing Employment,” the 1.5 million manufacturing jobs lost in the first year of that downturn far exceeds the 900,000 jobs lost during the first year of the far more severe Great Recession.
Now one could blame the the sharp drop in 2001 on the U.S. granting of permanent normal trade relations to China in October 2000, just a few months before the March 2001 business-cycle peak. But there’s a flaw with that theory, Pierce and Schott explain:
While trade liberalization is a prime suspect in the overall decline of U.S. manufacturing employment in recent decades, PNTR is notable for having had little effect on the tariffs actually applied to Chinese imports.
But yet there may be a linkage nonetheless:
Rather, the principal impact of PNTR was to eliminate uncertainty. Prior to receipt of PNTR, exports from China were subject to potentially large increases in U.S. import tariffs due to politically contentious annual renewals of its temporary NTR status. The shift in U.S. policy in October 2000 and the related entry of China into the WTO in December 2001 eliminated the possibility of these jumps. …
We measure this uncertainty as the gap between actual tariff rates and the level to which they might have risen had their continuation before 2001 been rejected by the President or Congress. We find that employment losses are larger in industries with higher gaps, and that these employment declines are associated with relative increases in U.S. imports from China, the number of U.S. firms importing from China, the number of Chinese firms exporting to the United States, and the number of U.S.-China importer-exporter pairs. …
These relationships demonstrate that U.S. imports surge in precisely the set of goods where domestic employment loss is concentrated, and with the exact trading partner that is the subject of the shift in U.S. trade policy
The analysis shows that U.S. manufacturers responded to greater competition from low-wage China by substituting machines and higher-skilled workers for low skilled production workers. With the uncertainty around tariff production gone, U.S. producers were induced “to invest in skill- intensive production technologies and mixes of products that are more consistent with U.S. comparative advantage.” In other words, economics worked as it was supposed to. Unfortunately, the U.S. education system hasn’t quite picked up on that reality yet.
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