There’s no way to miss the dramatic loss of manufacturing employment Indiana has experienced in the past generation. Since about 1980, there has been a roughly 60 percent drop in the number of manufacturing workers in the state.  Why is this so?  

Many Hoosiers blame globalization for these job losses (even if they support free trade).  There’s plenty of anecdotal evidence by way of Chinese made toys (which litter the backseat of my minivan). But once you get past this anecdote, the data tells a very different story.  

The USA imports more goods than it exports.  I often hear that this is both bad and unsustainable. But history tells us otherwise. We’ve been running this trade imbalance since the 1970s, a period of American economic ascendancy and dominance. Today the trade imbalance (our exports minus imports) amounts to more than $800 billion.  That is a big number – but to put it into perspective it is roughly the same amount U.S. firms pay for advertising each year or about the size of the U.S. movie industry.  But, how can we keep buying more than we’re making?  There are three answers.  

The first is we’re not. The trade data only counts the value of goods shipped – it almost entirely misses the value of traded services.  So anytime a non-good transaction occurs it is likely to be missed. For example, if each of the 600,000 or so foreign students studying at U.S. universities pays $30,000 for room and board we are actually exporting $18 billion that’s not captured by trade data. Second, a good many developing countries are actually subsidizing U.S. consumers indirectly (by keeping their currency undervalued).  Third, US financial institutions are so safe that foreign depositors pay a premium for this privilege. This foreign investment subsidizes our consumption of goods.    

In the end, only a trivial fraction of job losses in manufacturing can be explained by foreign trade (I calculate less than 5% of the total over the past 25 years).  We have to look elsewhere for the culprit.  There are two other explanations.  The first is that individual businesses are increasingly outsourcing specific non- production line tasks.  So jobs ranging from human resources to custodial work that used to be counted as a manufacturing job are now performed under contract by another firm.  Thus, a part of the loss in manufacturing (and growth in services) is then a statistical artifact of how jobs are counted.  But this doesn’t explain even a quarter of the job losses.  

The fundamental cause of most of our manufacturing job losses is simply increasing worker productivity.  Since the late 70s the U.S. population has been rising by about 1.1 percent per year, but the value of manufactured goods produced by each worker has been rising by 4 percent per year.  The higher demand for goods (due to higher population) is heavily outpaced by the productivity growth of manufacturing workers.  The mathematics is daunting.  With 4 percent productivity growth per year, it takes only 18 years for a manufacturing worker to double the value of the goods they produce (in inflation adjusted dollars).  If you add the overall population growth rate – as a good measure of growing demand – then factories can cut their labor force by 50 percent every 22 years.  That’s just about what has happened in Indiana over the past generation.    

The real question about manufacturing jobs isn’t why so many have disappeared, but why so many still remain?