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OCR Page 1 of 12Gerald Shea - MANUF WPD
Page 1
LABOR
Manufacturing Matters: Why Manufacturing is Special and the Economic Policies Needed
to Foster a Strong Manufacturing Sector
Executive summary
Today, the manufacturing sector is in crisis having lost 491,000 jobs since March 1998. This
loss of jobs is the direct result of the global economic slow down that followed the east Asian
financial crisis that began in mid-1997. The massive devaluations of the currencies of the crisis
countries, and the slow but steady appreciation of the dollar against many of the world's other
currencies have also contributed to a sharp slow down in manufacturing export growth and an
acceleration in the growth of manufacturing imports. The impact of these developments is
reflected in our trade deficit which has reached record levels and threatens to surge to over $300
billion this year.
Despite the traumatic impact on manufacturing, economic policy has done little to assist
manufacturing in coping with the current crisis. This failure has its origins in misguided
conventional wisdom that asserts that manufacturing jobs do not matter. A job is a job, and all
that policy makers need be concerned about is that the total supply of jobs grows at a rate
sufficient to ensure full employment.
The foundation of this conventional wisdom is that manufacturing employment has fallen
steadily as a share of total private employment for almost four decades. However, while the share
of manufacturing employment has fallen steadily, the absolute level of manufacturing
employment rose through to 1979. Since 1979, both the share and the absolute number of
manufacturing jobs have fallen, and with those losses came rising income inequality, slowed
productivity growth, and a deepening trade deficit. A modest turn around in the 1990s yielded
slow steady growth in the number of manufacturing jobs which promised to break the decline in
manufacturing employment, but this promise has been shattered by recent events.
This paper provides argues that manufacturing does indeed matter to the overall health of
the economy.
Productivity growth is key to a rising standard of living. Manufacturing productivity growth
has been significantly faster than productivity growth in the rest of the non-farm business sector
since 1979. Had the manufacturing sector been larger, overall national productivity growth
would have been faster.
The paper presents evidence that productivity growth in the manufacturing sector spills over
positively on to productivity growth in the non-manufacturing sector. This finding is consistent
with the fact that the bulk of national R&D spending is done in the manufacturing sector, and
with the claim that social returns to R&D spending exceed private returns. It is also consistent
with the fact that manufacturing has strong backward input linkages to the non-manufacturing
economy.
Wages and income distribution. Manufacturing employment pays higher wages and
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