Tell Us Something We Don't Know: Employment is Down because Productivity is Up

In his July 4th New York Times OpEd piece, David Brooks wrote an otherwise interesting opinion on the G.O.P. tactics during this latest budget debate. One point he referenced as an economic concern, however, troubled me:

“Manufacturing employment is cratering even as output rises…”

What does that mean? Is it bad? Well, it would only be bad if both employment and productivity went down.

In the June 14 posting of the blog Carpe Diem, Mark Perry provided a great analysis on the reality of domestic production. Mr. Perry wrote: 

“We are constantly hammered with bad news about the decline in the number of manufacturing jobs in the U.S., but we never hear the good news about why that is happening: Manufacturing workers in America keep getting more and more productive, which then allows us to produce more and more output over time, with fewer and fewer workers. That’s a great story about an American industry that is healthy, successful and thriving, and not an industry in decline.”

He also provided the graph I have shared below to illustrate the enormous productivity gains the US worker has been part of over the last number of decades.

Though domestic manufacturing is doing quite a bit better than in the past, by no means do I believe it is “thriving” as Mr. Perry asserts. It is just better positioned to meet the opportunities of a vastly different global economic landscape. 

Manufacturing more than most industries has changed for the better because it had to. Through a combination of lean manufacturing and the adoption of high tech machinery and software, domestic manufacturing has been able to sustain itself during the dark “outsourcing” movement of the last 20 plus years.

As production flowed overseas, domestic manufacturers had to face the reality of lowering their operating costs or die. Re-engineering and lean manufacturing became the business process initiatives necessary to drive productivity in otherwise cash starved enterprises. When the change process used to become especially challenging I remember saying to the companies we worked with:

“One day the cost of labor in China will become too costly and work will start flowing back to the US. Those that become lean and survive will be positioned to meet this opportunity head on. Work to be one of those companies.”

This is the power of the free market. Industries left tethered to some counter productive incentive often become bloated because there is no reason to change. Manufacturing on the large part were left un-tethered and had no choice but to change. Those that survived are now in a better place.

So back to Mr. Brooks comment. Manufacturing employment has catered because it had to in order to meet the real competitive pressures of off shoring. In order to survive they had to become more productive and productivity either meant producing more with the same or producing the same with less. This is a good thing!

Unfortunately, from a macro-economic stand point, this does not help the greater than 9% of unemployed workers left hanging. This is the employment challenge in the United States to which I have a few thoughts I would like to share in my next post.