If you’ve been following the increasingly loud national debate on U.S. trade policy that’s been supercharged by President Trump’s election, you’ll be really surprised by the results of this morning’s latest report from the U.S. Labor Department on America’s labor productivity. And if you haven’t been following the debate, you should be – as both trade policy generally and the productivity angle are really important for the nation’s future prosperity.
The big surprise (which has actually been unfolding for years now): On the one hand, folks who support current trade policies (meaning nearly the entire political, business, and media establishments in this country) insist that the president is wrong to blame these policies for the steep manufacturing job drop the nation has experienced for so long. Instead, they argue, productivity growth is the real culprit – manufacturers are using technology and better management to produce more and more goods with fewer and fewer workers. (Do I really need to provide links?) And complaining about technological progress and managerial improvements makes little sense – at best.
On the other hand, labor productivity – a relatively narrow but still crucial measure of efficiency, which is widely regarded as the prime long-term driver of American living standards – has been growing ever slower for many years now, even as manufacturing employment has tanked. The relationship certainly doesn’t track exactly over the short-term. But long-term, it strongly indicates that something other than better productivity has hammered the manufacturing labor market.
For example, during the 1990s economic expansion, when manufacturing employment dipped by only 0.38 percent, manufacturing labor productivity rose by 46.78 percent. (We’re going to compare expansions because that method yields the best – i.e., apples-to-apples – data.) During the shorter 2000s expansion, many more manufacturing jobs were lost – 12.44 percent of the nation’s remaining total. But the sector’s labor productivity improved by only a little less – 41.08 percent.
During the current economic expansion, which is still more than two years shorter than its 1990s predecessor but nearly two years longer than the 2000s expansion, manufacturing employment has actually risen by 4.68 percent. But industry’s labor productivity is up by just 22.88 percent. That’s less than half the rate of the 1990s expansion, which saw hardly any manufacturing job loss.
As for the latest manufacturing labor productivity figures – during a period when manufacturing employment has resumed falling – they’ve been miserable. In the second quarter of last year, it fell sequentially by 0.50 percent on an annualized basis. In the third quarter, it inched back up 0.04 percent. Finally, as reported this morning, manufacturing productivity increased by 0.72 percent.
In the rest of the economy (technically the non-farm business sector, according to the Labor Department), labor productivity has risen faster over the short run. After declining sequentially by an annualized 0.15 percent in the second quarter of last year, it rebounded by 3.49 percent in the third. Even better, that number was revised significantly upward – from 3.03 percent.
Yet that third quarter jump could well be an anomaly. Today’s preliminary fourth quarter figure was down to a 1.29 percent annualized gain, and during the current economic recovery, overall labor productivity has advanced by only 7.96 percent. The comparable numbers for the previous two recoveries? 23.01 percent and 16.07 percent, respectively.
Nothing has been heard from President Trump about the productivity growth slowdown, but he has certainly expressed alarm about the state of domestic manufacturing – historically, the American economy’s productivity growth leader. Because productivity growth is so central to national economic success, he’ll need to focus even more intently and precisely on such issues if he wants his presidency to go down as an historical winner.