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By JOHN NOLAN
Rochester Times
ROCHESTER — To explore the connections between dwindling local factory jobs,
the widening U.S. trade gap, the boom in "big box" retail employment, an
appetite for imported consumer goods and a weakening U.S. dollar, questions
were posed to three members of the faculty at the University of New
Hampshire.
Professor of Management Ross Gittell (R.G.)
Associate Professor of Economics Torsten Schmidt (T.S.)
Professor of Economics Evangelos Simos
(E.S.)
offered the following responses. Some questions were answered by all, and
others by some. The Sunday Citizen will print the responses this week and
next.
The questions and their individual replies:
1. Is the decline in N.H. manufacturing jobs, in actual numbers and
especially in proportion to the total number of jobs in the workforce,
reflected nationwide?
R.G. Yes ... but there is a more pronounced decline recently in New
Hampshire than the U.S. average. Over the last five years N.H. has lost more
manufacturing jobs on a percentage basis than any other state. About one of
every five jobs.
T.S. The percent reduction in manufacturing employment in N.H. was a little higher over the past recession than for the U.S. as a
whole, 26 percent vs. 22 percent.
The reduction in manufacturing employment as a proportion of total
employment is a phenomenon going back a long time. In the 1950s, the
fraction was higher than 30 percent. Now it is about 11 percent nationwide.
This is a huge change. So any discussion of employment in general by
highlighting what is happening to manufacturing employment will be
confounded by that trend. Many people are not aware of that trend, which
then poses a problem for having a meaningful discussion.
Let me add another comment: Knowing of this long-term trend, an emphasis on
manufacturing employment, rather than total employment, may be motivated by
an attempt to make the total employment situation look worse than it is. But
it may also be motivated by a belief that employment in manufacturing
industries is somehow more important for the economy as a whole than
employment elsewhere, producing a tangible output that can be seen, and
shipped from point A to point B. I do not share that view (which to me seems
tied up with an outdated conception of what constitutes economic value). But
it is a very popular view. I rather think of all forms of employment as
equally important than to give priority to certain sectors.
E.S.
Yes, N.H.
follows a national trend. In 1955, nationally 31 percent of all non-farm
workers were employed in manufacturing; in N.H.
it was 45 percent. In 1985, the ratio of manufacturing to total jobs
declined to 18 percent for the nation and 26 percent for N.H.
This year, the statistics show a nearly identical proportion of
manufacturing jobs; 11 percent nationally and 12 percent for N.H.
2. Please comment on this proportional decline and its significance, if
any, to the state’s economy and the country’s fiscal health.
R.G. See above.
T.S. What I said above suggests that I do not think that the shift in
employment away from manufacturing and towards other sectors (government,
health care, education, other private-sector services) poses a problem.
E.S.
The manufacturing sector is alive and kicking both nationally and at the
state level. Although jobs declined, output has increased, that is we
produce now more manufactured goods than ever before. If we look at the
state accounts, similar to the national accounts, the value of the state
product, adjusted for price changes, increased by an average rate of 4.3
percent per year between 1987 and 2001. During the same period, 1987-2001,
manufacturing output rose by an average rate of 5.9 percent per year, 1.6
percent per year faster than the overall state economy. As a result, the
share of manufacturing output to the total output of all goods and services
produced in the state has increased from 18 percent during 1986-87 to 23
percent during 2000-01.
Why then are manufacturing jobs declining? The answer is technological
progress. Labor productivity, which is the ratio of output to workers, is a
good measure of technological progress. In N.H.,
in 1986 labor productivity was $49,765, which is the amount of output, at
constant prices produced by the average blue-collar worker. In 2001, the
average N.H.
manufacturing worker was producing $97,854 dollars of output, again after
removing the price effects, which is about two times more than in 1987.
In fact, the productivity of the N.H.-manufacturing
worker has been a lot higher than any worker in other occupations in the
state such as construction, services, etc. Labor productivity of all state
workers — including manufacturing — has increased by an average rate of 2.5
percent per year during 1987-2001. Not surprisingly, during the same period
manufacturing productivity has grown by an average annual rate of 7 percent,
about three times faster the state’s average.
What are the implications of a 7 percent growth in productivity? At one
extreme, N.H.
manufacturers could produce the same output with 7 percent less workers. At
the other extreme, state manufacturers could keep all workers and produce 7
percent more output. What did N.H.
manufacturers do? They increase output by 5.8 percent and decrease
employment by 1.2 percent per year. That translates to the 20,700 jobs lost
between 1987 and 2001.
3. Has there ever been a school of thought that says one manufacturing
job is needed to support x number of other jobs in the American economy? If
possible, could you expound?
R.G. It is normally thought that every manufacturing job produces one to two
additional jobs because of supplier relationships and opportunities and also
because of relatively high pay/wages in manufacturing.
T.S. I believe so, but because I am not an adherent of such a school, I
can’t say very much. Along similar lines, it has sometimes been suggested
(by politicians, mostly) that the current account deficit or trade deficit,
divided by a typical worker’s annual income, would correspond to the number
of jobs lost to the U.S. economy due to the trade gap. (E.g. if one puts the
worker’s income at $50,000 a year, then every $1 million in current account
deficit corresponds to 20 jobs). I don’t think such calculations make a
whole lot of sense, if taken seriously as an "if-then" comparison. Take the
extreme case of a complete cessation of all international trade. The current
account deficit would be zero. I’m somewhat skeptical there would be a
systematic rise in employment, but more importantly, there would likely be a
significant loss of real income in the U.S., because we would no longer be
taking advantage of trading opportunities with the rest of the world.
E.S.
There is a link but it changes with technology. For instance, fewer workers
producing more output in manufacturing is the result of increasing
employment in other industries and activities such as robotics, software R&D
and so on.
4. Is there a link between the decline in manufacturing jobs and the growing
American trade gap?
R.G. Yes ... most of the increased gap is in manufactured products ... and a
significant portion of that from manufacturing activity that shifted from
U.S. to foreign production.
T.S. Maybe there is a second-order effect, one of timing. If the
re-allocation of resources including labor when U.S. manufacturing
operations are shut down is slow, then I can see a case being made that in
the process of a large-scale rearrangement of who produces what, and where,
the two phenomena might be connected. If one accepts that idea, the next
question would have to be how well the magnitudes of the two phenomena
correspond to one another. (Perhaps such a calculation could begin as
follows: assuming the average displaced worker is out of work for six
months, and making a number of other assumptions, what portion of the
current account deficit might be related to the presumed fact that the
displaced workers do not find new employment immediately?) Such a
calculation might reveal how plausible, or implausible, the asserted
connection could be. From a longer-run perspective, I doubt that there is
much of a link. (Again, as an example why one should be skeptical, consider
the very large decline in farm employment over the past century or so. Some
people might think that the reduction in farm employment would have led to a
trade deficit in food. But that did not happen. The rise in productivity in
farming explains this. Similarly, there have been substantial increases in
productivity in the various manufacturing industries.)
E.S.
The trade gap is the result of two forces: exports and imports. For
instance, last month the nation registered an all time record in exports;
that is, U.S. companies sold abroad goods and services more than ever
before. At the same time, the trade gap was one of the largest in history
because of imports; they are driven by higher oil prices and a strong demand
by the American consumers who are not in recession any more and they buy
everything domestic and foreign.
5. How does the need for Americans to consume in order to sustain or boost
the domestic economy square with the need for a trade gap reduction to make
foreign lenders more comfortable? How is the trade gap being funded, year
after year, and what are the implications?
R.G. Eventually something has to give. U.S. cannot always consume
significantly more than it produces without long term negative consequences
... the question is not if, but when and how the "balance" will transpire
... will it be soon and relatively harmless or delayed with significant
negative impact? Now foreigners, including the Chinese, are funding our
trade gap.
T.S. As to the latter, we sell financial assets (stocks, government bonds,
corporate bonds) and real assets (land & buildings, firms). Also, the people
we trade with may be picking up larger cash holdings. Do foreign lenders
feel uncomfortable with the U.S. trade gap? The decline in the U.S. dollar
would, perhaps, be an indication (but I believe there is another reason for
that, which has nothing to do with the U.S. current account deficit; I
believe that the euro is in the process of being adopted as an international
reserve currency, partially displacing the U.S. dollar, and the weaker
demand for U.S. dollars is reflected by a lower price in the international
currency markets). But any one individual lender can always cash in their
financial assets; there are highly liquid markets in the financial assets I
mentioned. From that viewpoint, there is no reason for lenders to get
nervous. (Short of a fear, and I would think such a fear would be quite
irrational, that the U.S. government would default on its bonds, or of a
general collapse of international currency markets.) But then again the
individual lender may also be worried about all the other lenders’ worries.
If lots of foreign lenders are worried about the current account deficit,
then it may be reasonable for the individual foreign lender to be worried as
well. That makes it more rational to be worried, though not based on
"fundamentals." But even then you can dispose of the U.S. financial assets
any time you want.
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