Millennials: Hit Hard And Fighting Back

A lot has been written and said critical of millennials. The business press has been tough on their spending habits.  As a recent Federal Reserve Board study of millennial economic well-being explained:

In the fields of business and economics, the unique tastes and preferences of millennials have been cited as reasons why new-car sales were lackluster during the early years of the recovery from the 2007–09 recession, why many brick-and-mortar retail chains have run into financial trouble (through lower brand loyalty and goods spending), why the recoveries in home sales and construction have remained slow, and why the indebtedness of the working-age population has increased.

Politicians, even some Democratic Party leaders, have tended to write them off as complainers. For example, while on a book tour, former Vice President Joe Biden told a Los Angeles Times interviewer that “The younger generation now tells me how tough things are. Give me a break. I have no empathy for it. Give me a break.” Biden went on to say that things were much tougher for young people in the 1960s and 1970s.

In fact, quite the opposite is true.  For better or worse, the authors of the Federal Reserve Board study found that there is “little evidence that millennial households have tastes and preference for consumption that are lower than those of earlier generations, once the effects of age, income, and a wide range of demographic characteristics are taken into account.”  More importantly, millennials are far poorer than past generations were at a similar age, and are becoming a significant force in revitalizing the labor movement.

Economic hard times for millennials

The Federal Reserve Board study leaves no doubt that millennials are less well off than members of earlier generations when they were equally young. They have lower earnings, fewer assets, and less wealth.  All despite being better educated.

The study compares the financial standing of three different cohorts: millennials (those born between 1981 and 1997), Generation Xers (those born between 1965 and 1980), and baby boomers (those born between 1946 and 1964).  Table 1, below, shows inflation adjusted income in three different time periods for all households with a full-time worker and for all households headed by a worker younger than 33 years.

The median figures, which best represent the earnings of the typical member of the group, are shown in brackets.  Comparing the median annual earnings of young male heads of households and of young female heads of household across the three time periods shows the millennial earnings disadvantage.  For example, while the median boomer male head of household earned $53,400, the median millennial male head of household earned only $40,600.  Millennial female heads of household suffered a similar decline, although not nearly as steep.

Table 4 compares the asset and wealth holdings of the three generations, and again highlights the deteriorating economic position of millennials.  As we can see, the median total assets held by millennials in 2016 is significantly lower than that held by baby boomers and only half as large as that held by Generation Xers.  Moreover, millennials suffered a decrease in asset holdings across most asset categories.

Finally, we also see that millennials have substantially lower real net worth than earlier cohorts. In 2016, the average real net worth of millennial households was $91,700, some 20 percent less than baby boomer households and almost 40 percent less than Generation X households.

Fighting back

Millennials have good reason to be concerned about their economic situation.  What is encouraging is that there are signs that growing numbers see structural failings in the operation of capitalism as the cause of their problems and collective action as the best response.  A recent Gallup poll offers one sign.  It found a sharp fall in support for capitalism among those 18 to 29 years, from 68 percent positive in 2010 down to 45 percent positive in 2018.  Support for socialism remained unchanged at 51 percent.

A recent Pew Research poll offers another, as shown below. Young people registered the strongest support for unions and the weakest support for corporations.

Of course, what millennials do rather than say is what counts. And millennials are now boosting the ranks of unions.  Union membership grew in 2017 for the first time in years, by 262,000.  And three in four of those new members was under 35.  Figures for 2018 are not yet available, but given the strong and successful organizing work among education, health care, hotel, and restaurant workers, the positive trend is likely to continue.

Millennials are now the largest generation in the United States, having surpassed the baby boomers in 2015.  Hopefully, self-interest will encourage them to play a leading role in building the movement necessary to transform the US political-economy, improving working and living conditions for everyone.

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Politics in America: Politicians at State and Federal Levels Consistently Overestimate Popular Support for Conservative Positions

US elected leaders, and those that work for them, think their constituents are far more conservative than they are. The good news is that this means there is far more support for a progressive political agenda than one might think.  The bad news is that without sustained popular activism it is doubtful that elected leaders will change their policies accordingly.

The misinformed views of those running for state office

In August 2012, David E. Broockman and Christopher Skovron, surveyed candidates running for state legislative offices across the US.  They asked them their own positions and to estimate their constituents’ positions on same-sex marriage and universal health care.  Then, they compared candidate estimates with their constituents’ responses to questions on those issues that were included in a large national survey.

They found that “politicians consistently and substantially overestimated support for conservative positions among their constituents on these issues.”  More specifically:

The differences we discover in this regard are exceptionally large among conservative politicians: across both issues we examine, conservative politicians appear to overestimate support for conservative policy views among their constituents by over 20 percentage points on average. In fact, on each of the issues we examine, over 90% of politicians with conservative views appear to overestimate their constituents’ support for conservative policies. . . . Comparable figures for liberal politicians also show a slight conservative bias: in fact, about 70% of liberal officeholders typically underestimate support for liberal positions on these issues among their constituents.

The figure below illustrates their results.  Each scatter point represents a different district and shows the candidate estimate of district support for the issue in question and the actual surveyed district support for that issue.  Districts where the candidate accurately estimated the district position would be positioned along the linear grey line.  As we can see, both the blue line representing liberal politicans and the red line representing conservative ones lie beneath the grey line, showing that district residents are far more favorable to both these issues than either liberal or conservative politicians think.

Perhaps not surprisingly, when Broockman and Skovron resurveyed the politicians in November, they found that “politicians’ perceptions of public opinion after the campaign and the election itself look identical to their perceptions prior to these events, with little evidence that their misperceptions had been corrected.”

They did another survey in 2014 of the views and perceptions of state legislative candidates and office holders, this time asking about more issues, including ones dealing with gay and lesbian marriage, gun control, the right to abortion, and the legalization of illegal immigrants.  Once again they found that:

politicians from both parties believed that support for conservative positions on these issues in their constituencies was much higher than it actually was. These misperceptions are large, pervasive, and robust: Politicians’ right-skewed misperceptions exceed 20 percentage points on issues such as gun control—where these misperceptions are the largest—and persist in states at every level of legislative professionalism, among both candidates and sitting officeholders, among politicians in very competitive districts, and when we compare politicians’ perceptions to voters’ opinions only. That Democratic politicians also overestimate constituency conservatism suggests these misperceptions cannot be attributed to motivated reasoning or social desirability bias alone.

It’s no better at the federal level

Alexander Hertel-Fernandez, Matto Mildenberger and Leah C. Stokes did a similar study on the federal level. In 2016 they surveyed the top legislative staffers of every House and Senate member, asking them to estimate their constituents’ support for repealing Obamacare, regulating carbon dioxide, making a $305 billion investment in infrastructure, mandating universal background checks for firearm purchases, and raising the federal minimum wage to $12 an hour.  Then, they compared their estimates to district or state-level survey results.

They summarized their findings in a New York Times op-ed as follows:

if we took a group of people who reflected the makeup of America and asked them whether they supported background checks for gun sales, nine out of 10 would say yes. But congressional aides guessed as few as one in 10 citizens in their district or state favored the policy. Shockingly, 92 percent of the staff members we surveyed underestimated support in their district or state for background checks, including all Republican aides and over 85 percent of Democratic aides.

The same is true for the four other issues we looked at . . . . On climate change, the average aide thought only a minority of his or her district wanted action, when in truth a majority supported regulating carbon.

Across the five issues, Democratic staff members tended to be more accurate than Republicans. Democrats guessed about 13 points closer to the truth on average than Republicans.

Below is a visual summary of their results.

The authors also found corporate lobbying to be an important cause of this misrepresentation of public opinion. As Hertel-Fernandez, Mildenberger, and Stokes explain:

Aides who reported meeting with groups representing big business — like the United States Chamber of Commerce or the American Petroleum Institute — were more likely to get their constituents’ opinions wrong compared with staffers who reported meeting with mass membership groups that represented ordinary Americans, like the Sierra Club or labor unions. The same pattern holds for campaign contributions: The more that offices get support from fossil fuel companies over environmental groups, the more they underestimate state- or district-level support for climate action.

And it appears that corporate influence may have more to do with campaign contributions than the quality of corporate arguments.  As Eric Levitz, discussing the work in the Intelligencer, points out, “The study . . . found that ‘45 percent of senior legislative staffers report having changed their opinion about legislation after a group gave their Member a campaign contribution’ — and that 62 percent of staffers believe that ‘correspondence from businesses’ are ‘more representative of their constituents’ preferences than correspondence from ordinary constituents.’”

None of this means that we should abandon electoral work.  But it does make clear that simply working to elect “good” people, and hoping for the best, will only continue the country’s rightwing drift.  There are real forces at work encouraging elected leaders to create their own realities favorable to rightwing positions, including the willingness of conservatives to aggressively and regularly communicate their views to their representatives and, no doubt more importantly, corporate lobbying backed by financial contributions and a careful monitoring of votes.

We can overcome these forces, but only if we build strong popular movements that are able to organize and mobilize people to fight for the things we want, thereby shifting the terms of political debate and the consciousness of politicians in the process.  And, back to the good news: the studies above show that popular sentiment is far more receptive to progressive change than we might think from recent election outcomes and government policy.

The US Economy: Monopolized Product Markets And Precarious Work

Most economists and politicians sing the praises of competition.  It is supposed to keep firms on their toes for the benefit of consumers and workers.  Well, competition is certainly alive and well in the US, but the results are far from positive for working people.

Monopolized product markets

The Open Markets Institute recently issued a report that looks at recent changes in industry concentration in 32 different product markets.  It framed its work as follows:

while it may appear as though there are endless brands to choose from online and on the shelf, most are owned by a few large parent companies, the array of labels a mere façade creating the illusion of abundant options.

Locating data on how few companies control individual markets, though, has long been difficult, and not by accident. Although Americans used anti-monopoly policies throughout much of the 20th century to preserve competition, a shift in ideology in the late 1970s allowed increased monopolization across the economy. To shield this pro-corporate turn from the public, the Federal Trade Commission halted the collection and publication of industry concentration data in 1981.

To remedy this gap in public knowledge, Open Markets purchased extensive, up-to-date industry intelligence from IBISWorld, a team of analysts who collect economic and market data, with the intention of releasing the information regarding industry concentration to the public.

David Leonhardt, in his New York Times commentary on the report, includes the following summary chart:

And as Leonhardt notes, “If anything, the chart here understates consolidation, because it doesn’t yet cover energy, telecommunications and some other areas.”

These trends paint a picture of an economy in which a growing number of industries are dominated by a few powerful corporations, one that belies the conventional view that since our economy is subject to ever stronger competitive pressures, fears of monopoly domination are unjustified. This is not a new insight. For example, John Bellamy Foster, Robert W. McChesney, and R. Jamil Jonna made the same point in a 2011 Monthly Review article:

A striking paradox animates political economy in our times. On the one hand, mainstream economics and much of left economics discuss our era as one of intense and increased competition among businesses, now on a global scale. It is a matter so self-evident as no longer to require empirical verification or scholarly examination. On the other hand, wherever one looks, it seems that nearly every industry is concentrated into fewer and fewer hands.

The following chart, taken from the article, illustrates their point about growing industry concentration.

Foster, McChesney, and Jonna explain this “striking paradox” by showing how the competition that captures our attention is increasingly driven by, and largely takes place between, powerful, globally-organized corporations.  And, they also discuss the ways in which mainstream economic theory has worked to minimize public awareness of the resulting monopolization of economic processes and its negative consequences for the stability and vibrancy of the economy.

Precarious work

One negative consequence of these competitive battles is worth highlighting here: the transformation of labor relations which is making work, by design, more precarious.  As Lauren Weber, in a Wall Street Journal article titled “The End of Employees,” explains:

Never before have big employers tried so hard to hand over chunks of their business to contractors. From Google to Wal-Mart, the strategy prunes costs for firms and job security for millions of workers. . . .

The outsourcing wave that moved apparel-making jobs to China and call-center operations to India is now just as likely to happen inside companies across the U.S. and in almost every industry. . . .

The shift is radically altering what it means to be a company and a worker. More flexibility for companies to shrink the size of their employee base, pay and benefits means less job security for workers. Rising from the mailroom to a corner office is harder now that outsourced jobs are no longer part of the workforce from which star performers are promoted. . . .

Companies, which disclose few details about their outside workers, are rapidly increasing the numbers and types of jobs seen as ripe for contracting. At large firms, 20% to 50% of the total workforce often is outsourced, according to staffing executives. Bank of America Corp., Verizon Communications Inc., Procter & Gamble Co. and FedEx Corp. have thousands of contractors each.

Is it any wonder that income inequality has exploded in the US and even a record-breaking economic expansion in terms of longevity brings few benefits to working people?  Clearly, we need some new words, if not an entirely new song, if we are going to keep singing about competition.

We Need To Strengthen The Public In The US Public Sector

Many people have given up on the idea of government as an instrument of progressive social change, especially the federal government.  They think that the federal government is dominating and distorting economic activity and, more often than not, believe that the cause is a bloated, highly paid, and selfish federal workforce.

In fact, federal programs are increasingly being delivered by private contractors.  As a result, private employees doing work for the federal government now outnumber the federal workforce.  Moreover, in most cases, they are paid far more than the public employees they replace.  And, as more federal work is carried out under the direction of profit-seeking firms, there is good reason to believe that programs are reshaped to ensure that it is the private rather than public interest that is best served.

The declining share of federal workers

As a Public Goods Post explains:

the federal government workforce has not increased in absolute numbers in half a century. Not only is it the same size now as it was in the 1960s, since the 1980s it has shrunk. There are actually fewer government employees now than there were under Reagan even though the population has grown by over 30%.

As a consequence, as we see below, the size of the federal workforce as a share of the total civilian non-farm workforce has steadily fallen.  It is now less than 2 percent of the total.

The growth in private contractors

While the size of federal workforce has remained relatively unchanged for decades, the same is not true for real federal government spending on consumption and investment, as seen in the figure below.

So, how has the federal government been able to boost its activity with a relatively unchanged workforce?  The answer is an explosion in the use of private contractors.

According to the Public Goods Post,

the federal contractor workforce dwarfs the federal employee workforce nearly four-fold.

This massive third-party workforce has been mostly hidden from public view, kept intentionally out of sight by corporations and their lobbyists who have the most to gain, as well as by elected officials who want to claim that they are not growing government. Moreover, federal corporate contractors operate behind a shield of secrecy, enabled by their de facto exemption from the Freedom of Information Act (FOIA), and ensuring that they can operate without public scrutiny.

Fattening the corporate sector at public expense

This outsourcing of federal activities to private firms is likely an important reason for people’s dissatisfaction with government: they are far more expensive and their goal is profit not service.

A Project on Government Oversight study examined compensation paid to federal and private sector employees, as well as annual billing rates for contractor employees across 35 occupational classifications covering over 550 service activities.

It found, among other things, that:

Federal government employees were less expensive than contractors in 33 of the 35 occupational classifications reviewed.

Private sector compensation was lower than contractor billing rates in all 35 occupational classifications we reviewed.

The federal government approves service contract billing rates—deemed fair and reasonable—that pay contractors 1.83 times more than the government pays federal employees in total compensation, and more than 2 times the total compensation paid in the private sector for comparable services.

Here are some examples of the compensation bias favoring private contractors:

As bad as it is, this compensation bias is far from the whole story.  The fact is that public regulators incur significant costs trying to develop contracts that are supposed to ensure acceptable private contractor outcomes as well as actually monitoring performance.  And shortfalls in performance, an all too frequent outcome, require either additional federal expenditures beyond those initially stipulated in the contract or a lowering of public standards.

Moreover, a recent review of “the extensive global empirical evidence on the relative efficiency of the private versus public sectors” found no evidence:

that there is any systematic difference in efficiency between public and private sector companies, either in services which are subject to outsourcing, such as waste management, or in sectors privatized by sale, such as telecoms. . . .

This picture is further confirmed by examination of nine sectors which are most often subject to privatization, outsourcing and PPPs – buses, electricity, healthcare, ports, prisons, rail, telecoms, waste management and water – and the same results hold true in each sector: the evidence does not show any superior efficiency by private companies.

The challenge ahead

A report summarizing the discussions and outcomes of an October 2017 conference titled “Restoring Public Control of Public Goods” began as follows:

Over the past thirty-five years, government in the United States has been vilified and vitiated through a movement designed to de-legitimize government in the eyes of the public, to reduce government’s capacity to operate, and to replace that capacity with private contractors and other forms of privatization. . . .

We now are left with:

  • An increasingly hollowed-out, de-moralized, de-professionalized, and devalued government;
  • A hidden and growing “shadow government” of corporate contractors;
  • An array of expensive false economies–since, in fact, contracting out regularly costs taxpayers more than direct government provision of services;
  • Public goods that are so invisible as to be under-valued, and are therefore underfunded or struck from the budget;
  • Counter-productive systems of performance measurement that create further harmful (if sometimes unintended) consequences;
  • A citizenry that under-appreciates, or are unaware, of the public goods they receive.

The private sector has been quietly and efficiently winning its war to control and profit from public sector activities.  One can only hope that the recent interest in socialism will encourage a renewed popular commitment to work with public sector workers to resist this war on the public and build a new, more accountable, not to mentioned well-financed, public sector.

Forgotten Workers And The US Expansion

There is a lot of celebrating going on in mainstream policy circles.  The economy is said to be running at full steam with the unemployment rate now below 4 percent.  As Clive Crook puts it in Bloomberg Businessweek, “The U.S. expansion has put millions of people back to work and economists agree that the economy is now at or close to full employment.”

Forgotten in all this celebration is the fact that wages remain stagnant.  Also forgotten are the millions of workers who are no longer counted as part of the labor force and thus not counted as unemployed.

Forgotten workers

One of the best indicators of the weakness of the current recovery is the labor market status of what is called the core workforce, those ages 25-54.  Their core status stems from the fact that, as Jill Mislinski explains, “This cohort leaves out the employment volatility of the high-school and college years, the lower employment of the retirement years and also the age 55-64 decade when many in the workforce begin transitioning to retirement … for example, two-income households that downsize into one-income households.”

The unemployment rate of those 25-54 reached a peak of 9 percent in 2009 before falling steadily to a low of 3.2 percent as of July 2018.  However, the unemployment rate alone can be a very misleading indicator of labor market conditions.  That is certainly true when it comes to the labor market status of today’s core workforce.

A more revealing measure is the Labor Force Participation Rate, which is defined as the Civilian Labor Force (i.e. the sum of those employed and unemployed) divided by the Civilian Noninstitutional Population (i.e. those of working age who are not in the military or institutionalized). Because there can be significant monthly swings in both the numerator and denominator of this measure, the Labor Force Participation Rate shown in the chart below is calculated using a 12-month moving average.

As we can see, the Labor Force Participation Rate for the 25-54 core cohort has sharply declined, from a mid-2000 high of 84.2 percent, down to a low of 81.9 percent in July 2018. Mislinski calculates that:

Based on the moving average, today’s age 25-54 cohort would require 1.6 million additional people in the labor force to match its interim peak participation rate in 2008 and 2.9 million to match the peak rate around the turn of the century.

A related measure of labor market conditions is the Employment-to-Population Ratio, which is defined as the Civilian Employed divided by the Civilian Noninstitutional Population.  As we can see in the next chart, the Employment-to-Population Ratio of our core cohort has also declined from its mid-2000 peak.

Again, according to Mislinski,

First the good news: This metric began to rebound from its post-recession trough in late 2012. However, the more disturbing news is that the current age 25-54 cohort would require an increase of 1.2 million employed prime-age participants to match its ratio peak in 2007. To match its mid-2000 peak would require a 3.1 million participant increase.

The takeaway

Both the Labor Force Participation Rate and the Employment-to-Population Ratio are useful measures of the employment intensity of the economy.  And in a healthy economy we should expect to see high values for both measures for the 25-54 age cohort. That is especially true for a country like the United States, where the non-market public provision of education, health care, and housing is quite limited, and an adequate retirement depends upon private savings.  In other words, people need paid employment to live and these are prime work years.

The decline, over the business cycle, in both the Labor Force Participation Rate and the Employment-to-Population Ratio for our core cohort strongly suggests that our economy is undergoing a profound structural change, with business increasingly organizing its activities in ways that require fewer workers. More specifically, the lower values in these measures mean that millions of prime age workers are being sidelined, left outside the labor market.

It is hard to know what will become of these workers and by extension their families and communities.  Moreover, this is not a problem only of the moment.  This cohort is still relatively young, and the social costs of being sidelined from employment—and here we are not even considering the quality of that employment—will only grow with age.  We can only hope that workers of all ages will eventually recognize that our growing employment problems are the result, not of individual failings, but an increasingly problematic economic system, and begin pushing for its structural transformation.

The 21st Century Has Been Hard On US Households

The 21st Century has not been a good one for most working people in the United States.  In fact, for most of this century, real median household income has been below its starting value in January 2000.

The chart below shows real (inflation-adjusted) and nominal (or current dollar) median household income over this century.  As we can see, the fall in real median household income over most of the first eight years was nothing compared to the hit median household income took over the next 8 years. This record is even more appalling when one considers that the US was officially in an economic expansion from November 2001 to December 2007, and then again from June 2009 to the present.

The next chart brings the pressures working families have faced this century into sharper relief.  It shows the percentage change in real median household income, both monthly and using a three-month moving average, over time.  It does this by dividing the value of each median income variable by its respective value at the beginning of 2000.

It has been a long, hard slog, but finally, in 2018, the average household is enjoying some real growth in income.  Real median household income, as of March 2018, was 1.8 percent above its January 2000 level. The 3-month moving average was also 1.8 percent above its January 2000 benchmark.

While encouraging, recent gains have been far too small to compensate for the many preceding years of actual loss. Moreover, it remains to be seen how much longer this expansion will continue.  As the New York Times reported,

Federal Reserve officials are beginning to worry about a possibility that seems remote to workers who still feel left behind: the danger of the economy’s running too hot, destabilizing financial markets and setting off a rapid escalation in wages and prices that could force the central bank to slam the brakes on growth.

Translated, this means that if labor costs rise enough to eat into corporate profits, Federal Reserve officials will respond with interest rate hikes to slow down economic activity and weaken labor’s bargaining power.  And so goes the new century.

US Manufacturing Is Far From Healthy And The Main Reason Appears To Be Globalization

Public awareness and acceptance of the negative consequences of corporate-driven globalization on US workers has grown dramatically over the last years, aided in part by Donald Trump’s attacks on trade agreements like NAFTA.  Of course, Trump deliberately and misleadingly claims that US corporations have also suffered.  And, his tariff-raising actions are an ineffective response to worker difficulties.

Still, many economists continue to argue that the concern over trade is misplaced, that the US manufacturing sector is generally healthy, and it is technology, in particular automation, that is the main reason for the decline in US manufacturing employment.

A new paper by the economist Susan Houseman, “Understanding the Decline of US Manufacturing Employment,” is an effective rebuttal to their arguments. As she concludes: “The widespread denial of domestic manufacturing’s weakness and globalization’s role in its employment collapse has inhibited much-needed, informed debate over trade policies.”

What’s up with the manufacturing sector?  

Figure 1 shows that manufacturing employment remained roughly stable from the mid-1960s through the early 1980s, then began a slow decline until 2000, after which it fell dramatically.

Figure 2 compares the performance of the manufacturing sector–production and employment–with that of the private sector as a whole.  As we can see, the real GDP growth of the manufacturing sector has roughly matched the real GDP growth of the private sector (red and yellow lines; left scale).

Figure 2 also shows that manufacturing’s share of private sector GDP and employment has steadily fallen (green and blue-gray lines; right scale). Manufacturing’s share of private sector GDP peaked at 33 percent in 1953, falling to 13 percent in 2016.  Manufacturing’s share of private sector employment peaked at 35 percent, also in 1953, and fell to just under 10 percent in 2016.

Those who argue that our manufacturing sector remains healthy do so on the basis of the sector’s relatively strong growth record and the fact that it was achieved with ever fewer workers.  As Houseman comments:

many [research economists] have taken it as strong prima facie evidence that higher productivity growth in manufacturing—implicitly or explicitly assumed to reflect automation—has largely caused the relative and absolute declines of manufacturing employment. Even when some role for trade is recognized, it is deemed small, and the decline is taken as inevitable.

However, there is a bit of a puzzle here.  Figure 2 shows that manufacturing GDP growth has generally matched the GDP growth of the entire private sector at the same time that manufacturing’s share of private GDP has steadily fallen.  Houseman offers the solution to this puzzle: “If real GDP growth for manufacturing has kept pace with real GDP growth in the aggregate economy yet manufacturing’s share of private sector GDP is falling, then it must be the case that the average price growth of manufactured goods has been slower than the average price growth for the goods and services produced in the economy.”

In other words, a relatively slow growth in the price of manufactured goods would boost the real value of the goods produced.  At the same time, it would also cause a decline in the manufacturing sector’s share of total output.  And, an examination of price deflators shows just such price trends, with the overall price deflator for the private sector steadily rising and the price deflator for manufacturing remaining relatively constant in the post 1980 period.  Thus, the strong growth in manufacturing GDP and its related productivity/automation story rests heavily on the striking behavior of the manufacturing price deflator.

And therein lies the problem.  Houseman finds that the strong growth in real manufacturing GDP is driven by the price behavior of goods produced by a small subset of manufacturing, namely the computer industry (which she broadens to include semiconductors).  “Although the computer industry has accounted for less than 15 percent of value-added in manufacturing throughout the period, it has an outsized effect on measured real output and productivity growth in the sector, skewing these statistics and giving a misleading impression of the health of American manufacturing.”

Digging into the data 

Figure 4 shows price indices for private industry and manufacturing, omitting the computer industry, and for the computer industry alone. Without the computer industry, the price indices for private industry and manufacturing have largely tracked each other.  The computer industry price index, on the other hand, has marched to the beat of a far different drummer.

Figure 5 illustrates the importance of the above deflators to the debate about the health of the manufacturing sector.  Starting in the mid-1980s we see an ever-greater gap between the real GDP growth of manufacturing without the computer industry (blue-gray line) and the growth of real GDP in the private sector and manufacturing (including the computer industry).

More specifically, “From 1979 to 2000, measured real GDP growth in manufacturing was 97 percent of the average for the private sector; when the computer industry is dropped from both series, manufacturing’s real GDP growth rate is just 45 percent that of the private sector average.” Growth in the manufacturing sector, with the computer industry omitted, has been exceptionally slow over the years 2000 to 2016. Over that period, “real GDP growth in manufacturing was 63 percent of the average private sector growth. Omitting the computer industry from each series, manufacturing’s measured real output growth is near zero (about 0.2 percent per year) and just 12 percent of the average for the private sector in the 2000s.”

So, without the computer industry, manufacturing is clearly struggling.  But what explains the strong computer industry performance?  As we see next, there is also reason to believe that the computer industry’s performance, and thus its contribution to the manufacturing sector, is also seriously overstated, thereby further undermining claims of manufacturing’s health.

The computer industry

The real GDP of an industry is calculated by dividing the yearly dollar value of industry sales by its price deflator.  A real increase in output thus requires that industry sales grow faster than industry prices; if sales double and prices double there is no real gain.

Product quality changes slowly in most industries allowing rather straightforward year to year comparisons of dollar output.  However, the computer industry stands as an outlier; for years now, it has produced significantly more powerful products each year.  And, on top of that, it has even lowered their prices.

As a result of this unusual behavior, estimating the real growth of the computer industry requires a complicated adjustment of the industry’s price index to account for the yearly increase in computer power and speed.  In broad brush the adjustment is handled as follows: If a consumer buys a computer that has 20 percent more computing power than the previous year’s model, the government considers that every 100 new computers produced are the equivalent of 120 of the previous year’s model.  The result of such an adjustment is a significant increase in the industry’s output even if the same number of actual computers are produced, an increase that is further magnified by the decline in industry prices.

While it is entirely reasonable to adjust the computer industry’s output for quality when studying the performance of that industry, we have to be careful when the results are used in the calculation of manufacturing’s overall performance. In fact, the computer industry’s rapid gains, based on significant increases in output with declining employment, are misleading as a measure of actual manufacturing activity for two reasons: first, they owe more to difficult-to-measure quality improvements driven by research and development, and second, a growing share of computer industry production has been globalized which means that it takes place outside the country.

As Houseman says, “quality adjustment [for the computer industry] can make the numbers difficult to interpret. Because the computer industry, though small in dollar terms, skews the aggregate manufacturing statistics and has led to much confusion, figures that exclude this industry, as shown in Figure 5, provide a clearer picture of trends in manufacturing output.”  And as we can see those trends do not support the claims made that we have a healthy manufacturing sector.

The decline in manufacturing employment

Houseman similarly shows that productivity’s role in the decline in manufacturing employment has also been seriously overstated. As Figure 1, above, makes clear, the number of manufacturing workers has been falling for some time.

From 1979 to 1989 manufacturing lost 1.4 million jobs, with the losses concentrated in the primary metals and textile and apparel industries. “Employment in manufacturing was relatively stable in the 1990s. Although measured employment declined by about 700,000, or 4 percent, from 1989 to 2000, the net decline in jobs can be entirely explained by the [domestic] outsourcing of tasks previously done in-house. . . . Had these workers been counted in manufacturing, manufacturing employment would have risen by an estimated 1.3 percent rather than declining.”

As Figure 1 also shows, the explosive decline in manufacturing employment begins in the 2000s.  From 2000 to 2007, manufacturing employment fell by 3.4 million, or 20 percent. From 2007 to 2016, manufacturing fell by another 1.5 million.  And, of course, this was a period of intensified globalization, perhaps best marked by China’s 2001 entry into the WTO.

Examining the data, Houseman found that average annual employment growth in manufacturing was approximately 2.5 percent lower than the average employment growth in the private sector as a whole over the period 1977 to 2016.  Only 15 percent of that differential is accounted for by lower output growth in manufacturing, the rest is explained by higher productivity growth.  However, “When the computer industry is omitted from both series, 61 percent of the lower manufacturing employment growth is accounted for by manufacturing’s lower output growth, and just 39 percent by its higher labor productivity growth.”

As Housemen comments, “The point of this exercise is to show that there is no prima facie evidence that productivity growth is entirely or primarily responsible for the relative and absolute decline in manufacturing employment.”

And there is also reason to question the meaning of the strong computer industry productivity figures. Labor productivity is defined as the value-added of an industry divided by labor input.  In the case of the computer industry, the industry’s productivity growth was probably driven most by product improvements, not automation, that boosted its value added. However, global outsourcing of production also made a contribution. While outsourcing reduces the value added of the industry, the decline in labor input is far greater. Thus, it remains unclear how much productivity increases based on the automation of production have actually contributed to the decline in US manufacturing employment, even in the computer industry.

Most importantly, there is a growing body of research that points to globalization as the major factor behind the recent decline in US manufacturing employment.  For example, Economists David Autor, David Dorn and Gordon Hanson “conservatively estimate that Chinese import competition explains 16 percent of the U.S. manufacturing employment decline between 1990 and 2000, 26 percent of the decline between 2000 and 2007, and 21 percent of the decline over the full period.”  They also find that Chinese import competition “significantly reduces earnings in sectors outside manufacturing.”

In sum, there are good reasons for concern about the health of the US manufacturing sector and opposition to corporate-driven globalization strategies.