Don’t Blame Technology Or Robots

People who say that America is losing its manufacturing jobs because of automation (more robots) are either ignorant, or lying—many are both.

Sadly, these people are about as common as they wrong (very, on both counts).

Bad “economists” are everywhere, especially in journalism.  For example, Wolfgang Lehmacher wrote a column in Fortune on the subject:

…what then explains [manufacturing] job losses? It’s simple: factories don’t need as many workers as they used to, because robots increasingly do the work.

Let me be clear: that’s not wrong prima facie—factories are getting more efficient.  But that’s only half the story.

 

Output And Productivity Determine Employment

Employment is a balance between output (how much is made) and productivity (how efficiently it’s made).  If output increases, more workers are needed.  But if productivity increases, fewer workers are needed.  How does that work in practice?  Here’s an example.

Pretend Acme Automobiles Inc. (Acme) can build 1,000 cars with 100 workers.  They have a banner year, and decide to make 1,100 cars next year (10% more).  All else equal, this means they will need to hire 10 more workers (10% more) to make those cars.  More output means more jobs.

Now consider this: rather than making more cars, Acme invests their profits in better welding torches.  These torches make their workers 10% more productive.  This allows them to make 1,000 cars with 90 workers next year, thereby making them more profitable by saving them labor costs.  More productivity means fewer jobs.

This is the story that Fortune (and the other bad “economists” is peddling).

Finally, pretend Acme decides to do both: they make 1,100 cars, but also buy better welding torches (both output and productivity increase by 10%).  In this case, Acme would still need 100 workers, because although they need fewer workers to make each car, they’re making more cars.

The broader economy works the same way.  Between 1950 and 1979 manufacturing employment increased because output grew faster than productivity.  This was great for Americas: real wages were high, the middle class was growing, and economic inequality was decreasing—the economy grew and everyone benefited.

In the 1980s, employment stagnated, because output stopped growing as rapidly.  Between 1989 and 2000, output grew by 3.7% on average, while productivity grew by 4.1%.  This led to an average employment decline of 0.4% per year.

Since 2000, output has grown by only 0.4% per year on average, while productivity increased by 3.7%.  This has caused a massive layoffs—over 4 million American factory workers have lost their jobs since 2000.

Why Did Industrial Growth Slow?

America’s industrial output grew at around 4% per year until the mid-1990s.  What changed?

That’s when we started offshoring our production (both current and new) to countries like China and Mexico, rather than expanding capacity in Michigan or Illinois.

Instead of making stuff in America, we made it abroad and imported it.

 Offshoring, Not Automation, Is Causing America’s Manufacturing Job Loss #ALT

Notice how in 1994, the year NAFTA was signed, America developed a chronic trade deficit with Mexico. Likewise, the deficit with China widened dramatically after they joined the World Trade Organization in 2001.  Free trade isn’t what it’s cracked up to be.Everything we import replaces something we would otherwise make.  For example, if America needs 10 million pocket protectors, we can either make them, import them, or make some and import some.

So, if we imported 8 million pocket protectors, we would only need to make 2 million (the imports replace our production, not our consumption of pocket protectors).  This is how the trade deficit works: imports replace our production, not our consumption of stuff.  Therefore, the deficit is the value of America’s offshored production.

Offshoring Production Means Offshoring Jobs

How many?

A good place to start is by looking at how many manufacturing jobs we’ve lost: 7 million.  But we can do better than that.

American manufacturing contributes $2.2 trillion dollars to our economy.  Our trade deficit is almost $750 billion a year.  Since 78% of our trade deficit is in manufactured goods, this means that we’ve offshored $573 billion worth of production.  That’s one-third of our manufacturing industry.

Since manufacturing employs 12.3 million Americans, then we know that roughly 4 million more are displaced by imports.  Of course, labor-intensive industries are the first to go, which is why the numbers don’t match up.  But let’s continue on with 4 million.  There’s more to it.

Manufacturing brings wealth into a region, and therefore supports local services and supply chains.  For example, a car factory supports hairdressers and accountants, but not the other way around.  This “job multiplier” has been studied extensively.

As it turns out, each manufacturing job usually supports 1.58 other service jobs.  This means that since 4 million manufacturing jobs are displaced by imports, then about 6 million service jobs were also lost.

According to this method, the trade deficit costs America at least 10 million jobs.  More on that here.

If we run this multiplier by the total number of manufacturing jobs we’ve lost (7 million), then just over 18 million jobs have been displaced by imports.

This makes sense, especially when you remember that over 23 million Americans are truly unemployed.

This has caused enormous economic problems for America, and needs to be fixed before it’s too late.