The Productivity Paradox

Globalization is only part of the story of the decline of manufacturing jobs. For all its woes, the United States still produces many physical goods. We tend to forget this, because almost everything we pick up in the store says “Made in China.” While this is true of many consumer products, it is not true of many high-end nonconsumer goods, such as airplanes, industrial machines, and advanced medical devices. Newspapers rarely report this fact, but American factories produce the same output as China, more than double that of Japan, and several times that of Germany and Korea. The U.S. manufacturing sector alone is larger than the entire British economy, and it is growing. Since 1970, U.S. manufacturing has doubled its output, and it keeps expanding over time.

What is going on here? If production keeps increasing, how come manufacturing jobs keep disappearing? The reason for this apparent contradiction is that thanks to technological improvements and investment in new and more sophisticated machinery, U.S. factories are significantly more efficient than they used to be, so fewer and fewer American workers are needed to produce the same number of goods. Today the average factory worker in the United States makes $180,000 worth of goods each year, more than three times what he produced in 1978. Higher productivity is a very good thing for the economy in general, but the impact on blue-collar jobs is dramatic. Take General Motors, for example. In the 1950s, the glory years of Detroit, each GM employee made on average seven cars per year. By the 1990s that number had risen to about thirteen cars per year, and now it is twenty-eight cars per year. The math of job losses is pretty simple: compared to 1950, today GM needs four times fewer workers for each car it produces. Those workers who do have a job in manufacturing are now more productive than before and therefore earn higher wages, but there are far fewer of them.

 This is another of the intriguing paradoxes of economic growth: increases in productivity lower prices for consumers and raise wages, but they ultimately end up killing jobs. Critics stress the loss of jobs, but the reality is that an increase in the productivity of labor is the main way in which societies become more prosperous and elevate their standard of living. There is nothing new in this phenomenon. The American economy went through a similar transformation when it moved from being mainly agricultural to being industrialized. One hundred and fifty years ago, half of U.S. workers labored in a field. Today only one percent of workers are in agriculture, and most of us will live our entire lives without meeting a single farmer. Yet owing to technological improvements—things like tractors, fertilizers, better seeds—crops today are produced in much greater quantities and much more cheaply. As agricultural productivity soared in the twentieth century, rural income rose but the need for agricultural workers declined, so farmers moved en masse to urban factories. The same transformation is taking place again, as manufacturing productivity destroys manufacturing jobs but is making us, on average, richer.

New industries are not immune. Take a look at the evolution of American jobs in computer manufacturing and semiconductor manufacturing in Figure 2. Worldwide sales of computers and semiconductors have been exploding over the past twenty-five years, but employment in those two sectors has been plummeting. There are fewer production jobs in the computer manufacturing industry today than there were in 1975, before the personal computer was introduced. Indeed, the figure shows that the top year for employment was 1988—the year that Apple launched the Macintosh IIx and Commodore sold 1.5 million C64s to adoring fans, including me. Laptops were rare, computing power was ridiculously low, and tablets were made of stone. The semiconductor industry tells a similar story. It is common for states and municipalities to fight to attract semiconductor plants, and yet the number of production jobs in the industry has been declining for a decade.