Yale SOM’s Schott: This Is Where The Manufacturing Jobs Really Went

Yale School of Management’s Peter Schott is Poets&Quants’ Professor of the Week for his research on job loss

Did the U.S. lose millions of manufacturing jobs because of globalization and trade? Or was technology the culprit?

The answer, according to a new study, is “yes”: Both technology and trade were responsible for the massive job losses that swept the Rust Belt and other once-proud manufacturing centers over the past four decades, although it’s difficult to quantify exactly what impact each one had.

The paper, by Poets&Quants’ Professor of the Week, Peter K. Schott of the Yale School of Management, along with Teresa C. Fort of the Tuck School of Business at Dartmouth and Justin R. Pierce of the Federal Reserve, is called “New Perspectives on the Decline of U.S. Manufacturing Employment.” It was published last year in the peer-reviewed Journal of Economic Perspectives.

6.67 MILLION MANUFACTURING JOBS, 38% OF U.S. MANUFACTURING EMPLOYMENT, LOST

The authors start out with the grim statistics: Employment in U.S. manufacturing plummeted from 17.8 million in 1977 to 11.1 million in 2012, a loss of 6.7 million jobs, or 38% of manufacturing employment. But it came in two stages, dropping 12% from its late 1970s employment peak until 2000 but then plunging 25%, more than twice as much, from 2000 to 2012.

Those years encompassed the Internet bust, the September 11^th terrorist attacks, and the global financial crisis and Great Recession. But Schott and his co-authors drilled down into the U.S. Census Bureau’s Longitudinal Business Database to discern the impact of different macroeconomic factors in manufacturing’s decline. Determining exactly how many job losses were caused by technology or trade proved a daunting task, but they identified several themes that nonetheless illuminated the profound changes in employment the U.S. economy has seen.

First of all, they found firms going out of business were responsible for only one out of four jobs lost in U.S. manufacturing over the entire time period. What happened more often, they write, is that firms restructured, shuttering plants and focusing on nonmanufacturing (service) sectors, areas that have produced millions of new jobs while manufacturing employment shrank dramatically. “Adopting new technologies or adapting to import competition entails high fixed costs that continuing firms are better able to absorb and which are easier to implement by shuttering outmoded plants and opening new ones,” Schott and his co-authors write.

A RISE IN CHINESE IMPORTS COINCIDED WITH SHARP DECLINES IN U.S. EMPLOYMENT

Second, “domestic offshoring” of manufacturing jobs from unionized, high-cost regions to the lower-wage Sun Belt made a major impact. “We find a steady reallocation of manufacturing employment away from the north and east towards the south and west until 2000, when employment starts falling in all regions,” the researchers observe. “…Movement of U.S. manufacturing employment from the north and east towards the west and south up to 2000 may have been a precursor to international offshoring.”

“The 2000s is a period when firms’ use of computers and electronic networks increases,” the researchers note. Meanwhile, they point out, Chinese import penetration “rises relatively slowly in the 1990s before picking up in the 2000s.” That was when China was granted Permanent Normal Trade Relations before joining the World Trade Organization (WTO) in 2001. Earlier studies by Daron Acemoglu and David Autor of MIT, Schott himself, and others showed that momentous change coincided with sharp declines in employment and relative declines in cumulative earnings in the U.S.

“Both technology adoption and importing, including by U.S. producers, generally rise over the sample period, sometimes simultaneously,” the authors write, suggesting that these two trends worked hand in hand. They pose the question “whether technology adoption during this period was hastened by trade liberalization with China” but said both of them contributed to the huge drop in manufacturing jobs that have had so much economic, social and political impact over the past two decades.

Schott, 51, the Juan Trippe Professor of International Economics at Yale, focuses his research on how firms and workers respond to globalization, as well as the relationship between trade policy and firm productivity. He teaches classes in macroeconomics, international trade, and data analysis and has won teaching awards for the instruction of full-time and executive MBAs.

After earning his BS at The Wharton School of the University of Pennsylvania, Schott worked for five years at Sumitomo Bank, then returned to academia to get his master’s degree in political science and Ph.D. in business economics from UCLA. He joined the Yale SOM faculty in 1999 and has been there ever since.