The Resurgence in U.S. Manufacturing

Data recently released by the Bureau of Labor Statistics indicate that the U.S. ranked 7th among 19 countries in the increase in manufacturing output between 2009 and 2011.  Manufacturing output grew 16% in the past two years.  The highest growth in manufacturing occurred in Singapore and Taiwan.  Among European countries Sweden and the Czech Republic had the fastest growth in manufacturing.  Manufacturing output actually fell in the past two years in Australia and grew at the slowest rate in Denmark, Norway and France.

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The U.S. ranked 6th in worker productivity gains in the manufacturing sector between 2009 and 2011.   The five countries with the fastest productivity growth were the countries with the biggest growth in manufacturing output.  Australia was the only country where worker productivity fell.  Worker productivity grew at the smallest rate in Belgium, Canada and Norway.

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Manufacturing employment (measured by total worker hours) fell in 8 of the 19 countries reported by the BLS.  Manufacturing employment grew by 2.2% in the U.S. between 2009 and 2011 and that was enough to rank 6th.  The fastest growth in total employment in manufacturing occurred in Taiwan, Germany and South Korea.

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In summary, the U.S. has ranked near the top of developed countries in manufacturing growth between 2009 and 2011.  The growth in manufacturing since 2009 in the developed world has been fueled primarily by productivity gains rather than by increases in manufacturing employment.  Output, employment and productivity in manufacturing has grown more rapidly in Asian countries such as Taiwan and South Korea than in Europe.  Australia has lagged other developed countries in terms of manufacturing growth since 2009.

Pay and Productivity

On Labor Day weekend in 2012 labor’s share of national income is lower than it has been since World War II, and there is a widening gap between growth in output per hour and labor compensation.  There is no doubt that technological change and globalization have contributed to these trends.  The clearest path to mitigating these trends is better education and training programs to prepare workers for a highly competitive and dynamic global labor market.

Worker productivity is a key factor in determining pay.  In a competitive economy a worker’s wage equals the additional revenue generated by one more unit of labor services.  A worker who costs twice as much as another must be twice as productive, at the margin, in order to keep his/her job.  The key is worker productivity at the margin, which is difficult to measure.  The Bureau of Labor Statistics (BLS) reports average output per hour (which is higher than marginal output per hour) and has shown that wages and average productivity have diverged over the past two decades.

This week the BLS released productivity data for detailed retail trade industries in 2011.  Two of the industry leaders in productivity gains between 2010 and 2011 were book stores and florists.  Output per hour worked increased by 13.4% in book stores and by 20.6% in florists from 2010 to 2011.  A naïve interpretation of these data would lead to the prediction that wages should rise sharply for employees of book stores and florists.

Productivity in book stores and florists has risen because management has developed methods to sell more with fewer employees.  Employment in book stores is less than half of what it was in 2003 and employment in florists is down 43% since 2003.  The worker productivity gains at these retailers are unlikely to be the result of more productive and skilled employees, but instead due to efficiency gains.  The revenue generated by an additional hour of a worker’s time may well be about the same as it was a decade ago, with fewer workers in the store.  In this situation an increase in average worker productivity per hour doesn’t translate into wage gains.

Technological change and globalization have weakened the demand for labor in goods producing industries for decades.  Over the past decade gains in information technology have weakened demand for workers in the service and retail sectors as well.  These trends present a challenge for the labor movement in the U.S. on this Labor Day weekend.

The Challenge of Measuring Labor Productivity Gains

Five out of six private sector workers are employed in service-producing (rather than goods-producing) industries.  Much of our domestic production is also in services.  There is no doubt that computers, information technology and the internet have increased the productivity of service workers, especially those in business and scientific fields, over the past two decades.  However these productivity gains are extremely difficult to measure.  The Bureau of Labor Statistics makes a valiant effort to measure labor productivity gains in service industries.  A more careful examination of the detailed productivity data released by the BLS at the end of May casts doubt on our ability to measure productivity in the service sector.

Measuring labor productivity gains in the goods producing sector is relatively straight-forward.  An increase in labor productivity occurs when more physical units of output (of a given quality) are produced per hour worked.  The biggest challenge in measuring productivity in goods-producing jobs is adjusting for changes in the quality of the good being produced.

In service-producing industries it is extremely difficult to disentangle increases in the cost of an hour of a service-producer’s time and the quantity of the services provided.  Consider a situation where the cost of an hour of a lawyer’s time increased by 20% over a five-year period.  Is that a price increase, holding the quantity and quality of services rendered?  Or are more legal services being provided per hour because of productivity gains due to the internet and improvements in computer databases.  The same question can be asked for engineers, architects, consultants or accountants.

The following chart illustrates BLS measures of productivity gains (in output per hour) in three service-producing industries between 1987 and 2010.

Productivity fell in bars (technically drinking places serving alcoholic beverages) over the past twenty-three years.  It is unclear what makes a bartender less productive.  Apparently Americans are sipping their alcoholic beverages more slowly than we were in 1987.  It is even more surprising that janitorial service providers saw a bigger increase in productivity than engineering service providers over the past two decades.  Again it is unclear whether the BLS can measure how much more productive janitors have become.  Perhaps it takes 55.7% less time to clean floors than it did in 1987.  Or maybe are floors aren’t quite as clean as they used to be.

It is imperative that we accurately measure productivity gains in the service economy when we try to measure real GDP growth and price inflation.  If productivity measures for many detailed service-producing industries are inaccurate can more aggregated measures of real output and prices be reliable?  It is a challenge to accurately measure the quality and quantity of output in many industries in our information and service-based economy.  It isn’t exciting to devote more of our resources to developing better measures of prices and quantities in these industries, but it may be warranted.

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