Manufacturing Loss and Inequality

Ann Harrison and Margaret McMillan have a nice summary of their research on how increases in multinational employment overseas affects employment in the U.S. For our purposes, the interesting section is on how manufacturing job loss in the U.S. contributes to increases in inequality:

We then examine the mechanisms behind the contrast between the small positive wage effects of globalization within manufacturing and the relatively large negative wage effects we observe at the occupational level. We begin by showing that trade and offshoring are associated with a contraction in the manufacturing workforce. Then, using a large panel of CPS workers who are matched across surveys, we demonstrate that workers who switch industries within manufacturing experience almost no decline in wages. However, when workers relocate to the service sector, they experience a significant wage loss. The negative wage impact is particularly large among displaced workers who also switch occupations. We estimate wage losses of 2-to-4 percent among workers leaving manufacturing and an additional 4-to-11 percent wage loss among workers who also switch occupations. These effects are most pronounced for workers who perform routine tasks. This downward pressure on wages because of import competition and offshoring has been overlooked since it operates between and not within sectors.

In my opinion, I think this is saying that when workers move from one routine job in which workers have a fair amount of bargaining power (manufacturing) to another routine job in which they do not (services, e.g. retail, food service, etc.), their wages fall. It is not clear whether or not their level of productivity (how much value they produce per hour) has fallen.

While I can’t imagine a world in which nobody grows food or manufacturers things (we need to eat and we like physical things), I can imagine a world in which only a very small percentage of the (world’s) workforce does so. Maybe 2% work on farms and 2% work in factories with capital (tractors, harvesters, robots) doing most of the work. In that case, the rest of us would need to do something else. Most of that something else will be providing services to our fellow human beings. I’ll teach you economics, you can cook meals at a restaurant, he can sell me a car, and she can give me a massage.

This will be a fine world to live in. It will just be different. And it doesn’t need to be any more equal or unequal than the world we currently live in. A lot of it will simply depend on workers’ bargaining power and the incentives we build into the system.

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