What Happened to U.S. Manufacturing?

This loss of jobs—there was a 25 percent decline in U.S. manufacturing employment just from 2000 to 2012—has affected the lives of millions of workers, becoming an urgent problem in the late 2000s with the hollowing out of cities that relied on industrial activity. One question that researchers have tried to answer while studying the decline is whether trade or technology is the larger influencer in the sector’s outcome.

In “New Perspectives on the Decline of US Manufacturing Employment,” a paper published recently in the Journal of Economic Perspectives, Teresa Fort, an associate professor of business administration at Tuck, along with co-authors Justin Pierce of the Federal Reserve Board and Peter Schott of the Yale School of Management, study relatively unexplored dimensions of U.S. microdata to offer new insights on the evolution of U.S. manufacturing between 1977 and 2012. Their research highlights the difficulties in cleanly separating the trade and technology-based explanations from each other. They offer four new perspectives: industry and region, closure of outdated plants, and evolution of non-manufacturing activities of manufacturing firms.

With these new perspectives, it becomes clear that the root causes of manufacturing declines can differ among industries. For example, in sectors like automobiles, where robots have been replacing humans, there is a rise in output even as employment falls. However, the trade-based explanation finds more ground in sectors such as apparel, which is characterized by a heavy rise in import penetration and a fall in employment and output.

But industry variation doesn’t explain it all. Fort and her co-authors mention instances of firms shutting down obsolete, unprofitable plants and building new plants with the latest technology or using cheaper import alternatives. In fact, 63 percent of the overall change in U.S. manufacturing employment between 1977 and 2012 is due to the birth/death of plants of continuing firms.

The birth/death of factories is also motivated by a search for cheaper labor. Between 1977 and 2000, combined manufacturing employment fell by 2.3 million in the New England, Mid-Atlantic and East North Central regions, while U.S. regions with lower wages attracted employment until 2000, seeing a 0.8 million increase in jobs. There is indirect evidence that this quest for lower labor costs across the U.S. was a precursor to international offshoring.

Fort and her co-authors suggest that U.S. manufacturing firms expanded their non-manufacturing employment—becoming “neuro-facturers,” producers of intellectual services rather than physical goods—at the same time that they were decreasing manufacturing employment. Another example of the evolution of a manufacturer into a neuro-facturer is IBM, which increasingly offers data solutions rather than mainframes.

While examining the evidence, Fort and her co-authors found that both technology adoption and importing, including by U.S. producers, generally rose over the sample period of 1977 to 2012, sometimes simultaneously. This shows how closely intertwined the interactions of trade and technology are with the manufacturing sector.

With these new perspectives, it is clear that changes in the manufacturing sector can’t be explained with binary answers—trade or technology. By exploring the many dimensions that affect U.S. manufacturing, Fort and her co-authors contend that our understanding of it should be multifaceted as well.