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PeakTrader said...

Manufacturing output per worker likely increased mostly from a combination of changes in demographics, lower interest rates, and more international trade.

Manufacturing output per worker rose less in the 1965-82 bear market than the 1982-00 bull market. Yet, it rose at a much steeper rate after another bear market began in 2000.

The Baby-Boomers (born between 1946-64) began to enter their peak productive years in 1982, which coincided with falling interest rates (reducing the cost of capital goods), while international trade and offshoring accelerated.

In the 2000s, U.S. manufacturing was producing higher value goods (including goods with market power), after offshoring lower value goods, while demographics (including from fewer workers) remained strong, and interest rates remained low.

Chart:

http://2.bp.blogspot.com/-1ITaLmlQo_c/Tdre43JSx2I/AAAAAAAAPUw/C_zWVWATpLg/s1600/mfgprod.jpg

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From Paul Krugman's book "Pop Internationalism" (updated, original source):

"Between 1970 and 1990 manufacturing declined from 25.0 to 18.4 percent of GDP. International trade explains only a small part of the decline in the relative importance of manufacturing to the economy. Why then has the share of manufacturing declined?

The immediate reason is that the composition of domestic spending has shifted away from manufactured goods. In 1970, U.S. residents spent 46 percent of their outlays on goods (manufactured, grown, or mined) and 54 percent on services and construction. By 1991, the shares were 40.7 percent and 59.3 percent respectively, as people began spending comparatively more on, for example, health care, travel, entertainment, legal services, fast food and so on. It is hardly surprising, given this shift, that manufacturing has become a less important part of the economy.

In particular, U.S. residents are spending a smaller fraction of their incomes on goods than they did 20 years ago for a simple reason: goods have become relatively cheaper. Between 1970 and 1990 the price of goods relative to services fell 22.9% percent. Goods have become cheaper primarily because productivity in manufacturing has grown much faster than in services. The growth has been passed on in lower consumer prices.

Ironically, the conventional wisdom here has things almost exactly backward. Policymakers often ascribe the declining share of industrial employment to a lack of manufacturing competitiveness brought on by inadequate productivity growth. In fact, the shrinkage is largely the result of high productivity growth, at least as compared with the service sector. The concern that industrial workers would lose their jobs because of automation is closer to the truth than the preoccupation with a presumed loss of manufacturing because of foreign competition."