Decreases In Manufacturing’s Share Of GDP And Employment Are A Result Of Increasing Productivity

Mark Perry
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From the paper “Assessing NAFTA – Part II: The Impact of NAFTA on Jobs, Wages, and Income Inequality,” by Victoria Hottenrott (University of Heidelberg) and Stephen Blank (Pace University):

“The reason for the decline in the share of manufacturing in U.S. GDP is that the composition of domestic spending has shifted away from manufactured goods. In 1970, U.S. residents spent 46 percent of their outlays on goods (manufactured, grown, or mined) and 54 percent on services and construction. By 1991, the shares were 40.7 percent and 59.3 percent respectively, as people began spending comparatively more on, for example, health care, travel, entertainment, legal services, and fast food. The reason is that goods have become relatively cheaper, primarily because productivity in manufacturing has grown much faster than in services, which is passed on in lower consumer prices.

Ironically, the conventional wisdom here has things almost exactly backward. Policymakers often ascribe the declining share of industrial employment to a lack of manufacturing
competitiveness brought on by inadequate productivity growth. In fact, the shrinkage is largely the result of high productivity growth, at least as compared with the service sector. The concern that industrial workers would lose their jobs because of automation is closer to the truth than the preoccupation with a presumed loss of manufacturing because of foreign competition.”

MP: The chart above shows the incredible increases in U.S. manufacturing productivity, which has made American manufacturing increasingly more efficient and more competitive, leading to lower prices for manufactured goods.  Because the productivity gains for manufacturing have exceeded productivity gains for services-producing industries, the prices for manufactured goods have fallen relative to prices for services, which had led to decreases (increases) in manufacturing’s (service’s) share of GDP and employment. 

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