Blog Post

Manufacturing in the US: Will Trump’s strategy repatriate highly-paid jobs?

Trump has set out a plan to repatriate highly-paid manufacturing jobs to the US. But the idea that manufacturing jobs are better paid than service roles is a myth. Moreover, labour markets are slow to shift between sectors. An aggressive trade policy may create some jobs in manufacturing but will not be a benefit to US citizens in general.

By: Date: January 6, 2017 Topic: Global Economics & Governance

Incoming US president Donald Trump has been running on a political ticket to re-negotiate trade deals. He has been promising “fairer” deals that would reduce US trade deficits and preserve well-paid manufacturing jobs.

Two of Trump’s closest advisors, Peter Navarro and Wilbur Ross, will hold key positions in the new administration. They spelled out their economic policy vision in a document published on September 29 on Trump’s website, entitled “Scoring the Trump economic plan: trade, regulatory, & energy policy impacts”. Much has been said about this document already. Former US treasury secretary Larry Summers has called it “ well beyond Voodoo economics”.

One of the central claims in the paper is that trade deals have allowed companies to relocate factories away from the US, thereby leaving “Mr and Ms America …back home without high-paying jobs” (p 4). The basic contention is that “bad” trade deals lead to trade deficits, which in turn reduce the size of the manufacturing sector and leave US workers only with lower-paid service sector jobs. The authors explicitly claim that “service sector jobs tend to be of lower pay” (p9).

For wonks: if a sector has higher productivity growth and preferences are normal, a simple model shows that the share of that sector in the economy’s total employment will fall. This is also the reason why employment in agricultural sector has fallen so dramatically.

It is true that in a simple economic model with a tradable sector, call it manufacturing, and a non-tradable sector, call it services, a higher trade deficit will tend to mean less domestic manufacturing and more service sector employment (see this short graphical analysis by Paul Krugman). Of course, technological progress has been a major driver of losses in manufacturing jobs in the US and elsewhere. Nevertheless, there is truth in the claim that trade policy affects the number of jobs in manufacturing.

But is it really true that service sector jobs are worse paid than manufacturing jobs?

In figures 1a and b, I show the evolution of average hourly earnings in the US. The difference between the two has been falling substantially and is now at less than 80 cents per hour, that is about 3% – a rather small difference. When one takes out supervisory roles (see figure 1b) and focuses on just the “ordinary” worker/service provider, then the difference actually becomes negative and service sector jobs are better paid on average than manufacturing jobs. By about 80 cents an hour.

Figure 1a – Average hourly earnings, Dollars per hour, all employees

Note: Monthly, Seasonally Adjusted – All Employees

Source: FRED.

fig1a

Figure 1b – average hourly earnings, Dollars per hour, production and non-supervisory employees

Note: Monthly, Seasonally Adjusted – Production and Nonsupervisory Employees

Source: FRED.

fig1b

Figure 2 compares hourly earnings in different sectors of the US economy. The traditional manufacturing sector does not rank among the most highly paying sectors.

Figure 2 – average hourly earnings of production and non-supervisory employees by sector in November 2016, Dollars per hour, seasonally adjusted

Source: FRED.

fig2

For wonks, the Balassa Samuelson theorem starts from this assumption to explain why more developed countries tend to have higher price levels.

To an economist, these results are hardly surprising. In an integrated labour market, economic theory would predict a certain convergence in wage levels across sectors to the extent that employees will tend to move to sectors with higher compensation, thereby contributing to wage level convergence.

So what effect would a systematic policy forcing companies to repatriate their factories to the US have?

What would happen if manufacturing companies followed the example of Ford and brought their production back to the US? There are two potential scenarios:

  1. If the US were not to impose tariffs on foreign competitors, American consumers would quickly shift to buying Volkswagens built in Mexico rather than Fords built in the US. This would be inevitable, because the price of Fords produced at American wage levels would be higher than those of Volkswagens produced at Mexican wage levels. Ford might then soon have to scale back production significantly, leading to job losses.
  1. Of course, the incoming President could decide to increase tariffs to protect American production. This is, in fact, what Trump’s recent Tweet regarding Toyota Motor suggests will be his future policy. In that case, American consumers would have no choice but to buy more expensive American-produced cars and bear the additional cost. In turn, they would tend to suppress their consumption of American services. Wage levels in the manufacturing sector could rise but that would only attract more people to move into these sectors, possibly eliminating the wage advantages again. The bottom line would be less consumption overall and reduced welfare as the US foregoes the benefits of specialisation that trade brings.

This analysis does not even consider possible retaliation measures by trading partners that may penalise products exported from the US, which could have negative impacts on the US manufacturing base.

What is more, there is an important political economy dimension to all of this: workers cannot move from one sector to another without difficulty. To a worker that has lost their manufacturing job in Detroit, a trade policy aimed at bringing back manufacturing jobs is good news. But if others in services lose their jobs, they do not stand to benefit.

Not only is it simply wrong to claim that any manufacturing jobs gained through a more aggressive trade policy would definitely offer higher salaries than the service sector jobs lost, as the data above clearly shows. It is also not the case that displaced service workers would simply be able to take up any additional manufacturing jobs instantly. A server cannot leave the restaurant on Friday and start to build cars on Monday.

A more sophisticated argument is that the speed with which economies were opened to major players like China may have been too fast. A recent paper by Autor et al points out that trade induces rapid change to which labour markets cannot easily adjust. Opening up too quickly to trade with competitive partners like China may therefore not be an optimal strategy. But it is still hard to see how putting up barriers after the fact would be a winning policy for Trump’s America.

So, on the whole, Trump’s strategy looks like a losing proposition – contrary to his advisors’ claims. It might mean more manufacturing jobs, so long as partners do not engage in a trade war, but those jobs would not actually be better paid and service-sector Americans would struggle to take them up anyway.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read about event

Upcoming Event

Sep
7-8
09:00

Bruegel Annual Meetings 2017

The Annual Meetings are Bruegel’s flagship event. They offer a mixture of large public debates and small private sessions about key issues in European and global economics. In a series of high-level discussions, Bruegel’s scholars, members and stakeholders will address the economic policy challenges facing Europe.

Speakers: José Antonio Álvarez Álvarez, Agnès Bénassy-Quéré, Pervenche Béres, Grégory Claeys, Zsolt Darvas, Jean Luc Demarty, Maria Demertzis, Anna Ekström, Lowri Evans, Sandro Gozi, Peter Grünenfelder, Patrick Graichen, Reiner Hoffman, Levin Holle, Kate Kalutkiewicz, Steffen Kampeter, Peter Kažimír, Emmanuel Lagarrigue, Matti Maasikas, Steven Maijoor, Nathalie Moll, James Murray, Julia Reinaud, Carlos Sallé Alonso, André Sapir, Dirk Schoenmaker, Mateusz Szczurek, Marianne Thyssen, Reinhilde Veugelers, Nicolas Véron, Liviu Voinea, Johan Van Overtveldt, Ida Wolden Bache, Guntram B. Wolff and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Square - Brussels Meeting Centre
Read about event More on this topic

Upcoming Event

Sep
13
09:00

EU-China Economic Relations: Looking to 2025

This event will see the launch of a report on EU-China relations and discuss issues such as trade and investment, indusstrial cooperation and innovation and global governance

Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Opinion

The EU and the US: a relationship in motion

Europe’s post-crisis recovery has been disappointing in comparison with the USA. But lower rates of inequality are staving off populism and bolstering support for globalisation. With the USA an increasingly unpredictable partner, the EU must address internal imbalances and build alliances to defend the multilateral order.

By: Maria Demertzis Topic: Global Economics & Governance Date: July 28, 2017
Read article More on this topic More by this author

Blog Post

The US retail crisis

What’s at stake: America is undergoing a retail sector crisis, partly related to the increase of competition from online commerce. We review recent contributions to this debate.

By: Silvia Merler Topic: Innovation & Competition Policy Date: July 17, 2017
Read about event More on this topic

Past Event

Past Event

Europe's global positioning and its trade implications for Asia

This event, taking place in Hong Kong will discuss Europe-Asia relations in the context of global developments.

Speakers: Alicia García-Herrero, Peter Mandelson, David Tweed and Guntram B. Wolff Topic: Global Economics & Governance Location: Bloomberg Hong Kong Office 25/F, Cheung Kong Center, 2 Queen's Road, Central, Hong Kong Date: July 7, 2017
Read article More on this topic More by this author

Podcast

Podcast

Global trade and Europe

Multilateral trade has generated a huge amount of wealth, and lifted many around the world out of poverty. But there is also growing awareness that globalisation is creating “losers”, and this risks feeding a backlash against multilateral trade. We explore the benefits and risks of multilateral trade, and ask how Europe should behave in a shifting context

By: The Sound of Economics Topic: Global Economics & Governance Date: June 30, 2017
Read article More on this topic More by this author

Blog Post

The US 100% renewables dispute

What’s at stake: Two years ago, a debate started on whether it would be feasible for the US to achieve 100% renewable energy power. The arguments on both sides have been fierce, and more has been written recently. We review the debate.

By: Silvia Merler Topic: Energy & Climate Date: June 26, 2017
Read article More on this topic

Blog Post

Can EU actors keep using common law after Brexit?

English common law is the choice of law for financial contracts, even for parties in EU members with civil law systems. This creates a lucrative legal sector in the UK, but Brexit could make UK court decisions difficult to enforce in the EU. Parties will be able to continue using English common law after Brexit, but how will these contracts be enforced? Some continental courts are preparing to make judicial decisions on common law cases in the English language.

By: Uuriintuya Batsaikhan and Dirk Schoenmaker Topic: European Macroeconomics & Governance Date: June 22, 2017
Read article More on this topic More by this author

Blog Post

The Fed’s problem with inflation

What’s at stake: the Federal Reserve raised the benchmark interest rate by one-quarter of a percentage point. The moved surprised no one, but it still prompted economists to asks themselves questions about the Fed’s relationship with inflation. We review the most recent contributions.

By: Silvia Merler Topic: Global Economics & Governance Date: June 19, 2017
Read article More on this topic

Blog Post

How export growth achieved adjustment of massive trade deficits in the euro area

The reduction of current account deficits in euro-area countries since the 2008 crisis is strongly driven by increases in exports that dampened the effect on production of the fall in demand and imports.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: May 31, 2017
Read article More by this author

Blog Post

Pharmaceutical industry at risk from Brexit

Pharmaceuticals are a hugely important industry for the EU and the UK. The sector creates thousands of jobs, billions of euros in exports, and is Europe’s most research-intense industry. But will Brexit mean for pharma? Border delays, disruption to R&D and regulatory divergence all pose hazards.

By: Jianwei Xu Topic: European Macroeconomics & Governance Date: May 31, 2017
Read article More on this topic

Blog Post

Adieu Paris: what’s next for climate policy if Trump ditches the Paris Agreement?

US President Trump has made it clear that he is not happy with the Paris Agreement. This week he will announce whether the US will withdraw from the Agreement altogether. What might that mean for the global fight against climate change? US decarbonisation is already well underway but the EU would need to step up and defend global climate governance.

By: Simone Tagliapietra and Georg Zachmann Topic: Energy & Climate Date: May 30, 2017
Load more posts