The Surprisingly Swift Decline of U.S. Manufacturing Employment

The Surprisingly Swift Decline of U.S. Manufacturing Employment

Justin R. Pierce Board of Governors of the Federal Reserve System

Peter K. Schott Yale School of Management & NBER

Disclaimer

Any opinions and conclusions expressed herein are those of the authors and do not necessarily represent the views of the U.S. Census Bureau, the Board of Governors or its research staff. All results have been reviewed to ensure that no confidential information is disclosed.

2

Post-War U.S. Manufacturing Employment

3

12

14

16

18

20

Em

plo

ymen

t (M

illio

n)

1948 1958 1968 1978 1988 1998 2008

NBER Recessions ShadedU.S. Manufacturing Employment


4

12

14

16

18

20

Em

plo

ymen

t (M

illio

n)

1948 1958 1968 1978 1988 1998 2008



5

12

14

16

18

20

Em

plo

ymen

t (M

illio

n)

1948 1958 1968 1978 1988 1998 2008


-2.9 mill over 3 years

12

14

16

18

20

Em

plo

ymen

t (M

illio

n)

1948 1958 1968 1978 1988 1998 2008



6

-2.9 mill over 3 years

Introduction

• The sharp decline in US manufacturing employment is closely linked to a change in U.S. trade policy granting China Permanent Normal Trade Relations (PNTR) status

• PNTR did not change actual tariff rates– They were already at the low levels offered WTO member– But this status required annual approval by Congress

• The possibility of large tariff increases before PNTR likely discouraged– US firms from offshoring– Chinese firms from expanding

7

Before Continuing…

8

200

400

800

1600

Rea

l Val

ue A

dde

d (B

illio

n)

10

12

14

16

18

20

Em

plo

ymen

t (M

illio

n)

1948 1958 1968 1978 1988 1998 2008year

BLS Employment BEA Real Value Added

Employment vs Log Real Value AddedU.S. Manufacturing

While US employment falls falls after 2001, real value added continues to rise at more-or-less the historical pace

Outline

• US-China Trade Policy

• Data

• Baseline results

• Extended results

• Other outcomes

• Conclusion

9

US NTR and Non-NTR Tariffs

• NTR = Normal Trade Relations– Synonym for Most Favored Nation (MFN)– Clinton?

• The US has two basic tariff schedules– NTR tariffs : generally low; for WTO members

– Non-NTR tariffs : generally high; for non-market economies;

: set by Smoot-Hawley (1930)

• So, how does China fit into these categories?

10

US-China Trade Policy, 1980-2001

11

1980 (February)China was granted temporary NTR status by the US Congress

Thereafter, this temporary NTR status requires annual re-approval by Congress

2000 (October)U.S. Congress grants China

PNTR, eliminating the risk that a failed vote might lead to a

jump in tariffs

2001 (December)China enters WTO

Annual renewals of MFN status were uncertain. The House tried to deny NTR every year after the Tiananmen Square incident; these efforts succeeded in 1990, 1991 and 1992, but the Senate failed to act on them in those years; the average vote against NTR from 1990-2000 is 38 percent

http://query.nytimes.com/mem/archive/pdf?res=F40815FC3F5F12728DDDA80B94D9405B8084F1D3

Measuring the Policy Change

• We define a measure of the effect of the policy as:

NTR Gap = Non-NTR Tariff – NTR Tariff

• Two useful attributes– Measures extent to which tariffs could increase prior to PNTR– Varies across industries

• We can preview the results in two simple pictures that divide US industries according to whether their NTR gaps are above or below the median

12

Preview of Findings – EmploymentPublic NBER-CES Data

13

• Split industries into two groups– Above median exposure– Below median exposure

.8

.9

1

1.1

1.2

200

1=1

1981 1986 1991 1996 2001 2006

Below Median NTR Gap Above Median NTR Gap

NBER-CES Manufacturing Industry DatabaseU.S. Manufacturing Employment

Preview of Findings – EmploymentPublic NBER-CES Data

14

• Split industries into two groups– Above median exposure– Below median exposure

• Trends are parallel before PNTR but diverge after PNTR

• (We use the gap as a continuous variable in our regression analysis.).8

.9

1

1.1

1.2

200

1=1

1981 1986 1991 1996 2001 2006

Below Median NTR Gap Above Median NTR Gap

NBER-CES Manufacturing Industry DatabaseU.S. Manufacturing Employment

Preview of Findings – TradePublic Census Trade Data

15

• Divergence is also evident in trade data

• Imports of more-exposed imports from China jump after PNTR relative to the imports from rest-of-world (ROW)

01

23

200

1=1

1991 1993 1995 1997 1999 2001 2003 2005 2007year

China: Below Mean China: Above Mean

U.S. Census Bureau Foreign Trade DataU.S. Imports Excluding Natural Resources

16

• Divergence is also evident in trade data

• Imports of more-exposed imports from China jump after PNTR relative to the imports from rest-of-world (ROW)

01

23

200

1=1

1991 1993 1995 1997 1999 2001 2003 2005 2007year

China: Below Mean ROW: Below MeanChina: Above Mean ROW: Above Mean

U.S. Census Bureau Foreign Trade DataU.S. Imports Excluding Natural Resources

Preview of Findings – TradePublic Census Trade Data

Outline


• Data



• Other outcomes

• Conclusion

17

NTR Gap = Non-NTR Tariff – NTR Tariff

• Compute NTR Gap for each HS8 using the ad valorem equivalent tariff rates from Feenstra, Romalis and Schott (2003)

• NTR Gap for industry i is the mean gap over the HS8s captured by the industry

• Available for 1989-2001, we use the NTR Gap for 1999 in the regression results to follow

18

Distribution of 1999 NTR Gap Across Industries

19

01

23

4D

ensi

ty

0 .2 .4 .6 .8

Distribution of 1999 NTR Gap

Mean: 0.32Std Dev 0.15

Census Employment Data

• LBDxxxxxxxxxxxxxxxxxxxx

• CMxxxxxxxxxxxxxxxxxxxxx

• LFTTD

• Annual employment of all U.S. establishments, 1977-2009

• Employment + other attributes for all manufacturing establishments every five years, 1977(5)2007

• Transaction-level US import data– Value– HS Product– Importer ID– Foreign exporter ID

20

Census Employment Data

• LBDxxxxxxxxxxxxxxxxxxxx

• CMxxxxxxxxxxxxxxxxxxxxx

• LFTTD

• Annual employment of all U.S. establishments, 1977-2009

• Employment + other attributes for all manufacturing establishments every five years, 1977(5)2007

• Transaction-level US import data– Value– HS Product– Importer ID– Foreign exporter ID

21

Outline


• Data



• Other outcomes

• Conclusion

22

Empirical Strategy

• We use a difference-in-differences strategy to examine the link between PNTR/WTO and U.S. manufacturing employment outcomes– 1st difference: industries with higher vs lower NTR Gaps– 2nd difference: growth after 2001 versus after 1990 (prior peak)

23

Industry-Level OLS Diff-in-Diff (DID)

24

Cumulative percent change in industry i

employment d years after NBER

peak t={1990,2001}

DID TermInteraction of indicator for

post-PNTR period and continuous, time-invariant

NTR Gap

Industry and peak-year

fixed effects

Industry attributes, e.g., K/L and S/L

t = NBER peak {1990,2001} d = 1:6 years after peaki = industry

Industry-Level OLS Diff-in-Diff (DID)

25

Cumulative percent change in industry i

employment d years after NBER

peak t={1990,2001}

DID TermInteraction of indicator for

post-PNTR period and continuous, time-invariant

NTR Gap

Industry and peak-year

fixed effects

Industry attributes, e.g., K/L and S/L

t = NBER peak {1990,2001} d = 1:6 years after peaki = industry

• Two sets of results– Baseline: only control for industry capital and skill intensity– Extended: control for everything we can think of

Basic Industry-Level RegressionsBold=statistically significant at 10% level

26

Percent Change in Industry Employment

Years After NBER Peak (LBD)

1 2 3 4 5 61{post-PNTR} x NTR Gapi -0.104 -0.187 -0.332 -0.387 -0.469 -0.482 0.058 0.082 0.105 0.114 0.149 0.147

ln(K/Lit) -0.058 -0.032 0.021 0.099 0.140 0.170 0.036 0.056 0.071 0.077 0.101 0.093

ln(S/Lit) -0.048 -0.110 -0.140 -0.131 -0.087 -0.108

0.046 0.059 0.075 0.087 0.096 0.111

Observations 652 652 652 652 652 652R2 0.67 0.70 0.70 0.70 0.66 0.66Fixed Effects i,t i,t i,t i,t i,t i,tEmployment Weighted Yes Yes Yes Yes Yes Yes

Implied Impact of PNTR -0.034 -0.060 -0.107 -0.125 -0.151 -0.156

0.019 0.026 0.034 0.037 0.048 0.047

Use LBD to examine outcomes 1:6 years after the 2001 vs 1990 peak


27

Absolute magnitude of DID coefficient rises over time; i.e., relative losses are persistent




ln(K/Lit) -0.058 -0.032 0.021 0.099 0.140 0.170 0.036 0.056 0.071 0.077 0.101 0.093

ln(S/Lit) -0.048 -0.110 -0.140 -0.131 -0.087 -0.108

0.046 0.059 0.075 0.087 0.096 0.111



0.019 0.026 0.034 0.037 0.048 0.047


28

Multiply DID estimates by average NTR gap (0.34) to compute implied impact

Post-2001 growth is 3-16 percent lower than after 1990




ln(K/Lit) -0.058 -0.032 0.021 0.099 0.140 0.170 0.036 0.056 0.071 0.077 0.101 0.093

ln(S/Lit) -0.048 -0.110 -0.140 -0.131 -0.087 -0.108

0.046 0.059 0.075 0.087 0.096 0.111



0.019 0.026 0.034 0.037 0.048 0.047


29

Results are robust to including industry capital and skill intensity

Later, we allow these relationships to differ in the pre- and post-periods




ln(K/Lit) -0.058 -0.032 0.021 0.099 0.140 0.170 0.036 0.056 0.071 0.077 0.101 0.093

ln(S/Lit) -0.048 -0.110 -0.140 -0.131 -0.087 -0.108

0.046 0.059 0.075 0.087 0.096 0.111



0.019 0.026 0.034 0.037 0.048 0.047

Baseline ResultsDID Controlling for Industry K/L and S/L Only

30

After 7 years, cumulative employment growth is 15.6 percent lower than 7 years after the 1990 peak

0-.

1-.

2-.

3R

elat

ive

Gro

wth

2002 2003 2004 2005 2006 2007

Note: Dashed lines indicate 90% confidence interval.

Baseline SpecificationImplied Impact of PNTR

After 1 year, cumulative employment growth is 3.4 percent lower than 1 year after the 1990 peak

Outline

• PNTR

• Data



• Other outcomes

• Conclusion

31

Alternate Explanations?

• Alternate explanations must explain:

– Timing: why do U.S. employment fall and Chinese imports rise with PNTR?

– Variation across industries: Why are changes in employment an imports greater for industries most affected by the policy change?

• Maybe the employment declines are related to changes in Chinese policy?– Not obvious why they would be correlated with the U.S. NTR gap,

but we can check…

32

Alternate Explanations

• Changes in Chinese Policy – Reduce barriers to foreign investment – Nunn (2007)– Lower import tariffs – Brandt et al. (2013)– Eliminate export licensing requirements – Bai et al. (2007)– Eliminate production subsides – Girma et al. (2007), Bown (2012)

• Union Resistance in the US – unionstats.org

• Bursting of the US tech bubble – IT dummy; control for prior growth

• Rising Chinese competitiveness – control for capital and skill intensity

• End of Textile and Clothing Quotas – Khandelwal et al. (2013)

33

Implied Impact of PNTRBaseline vs Extended

34

Results are similar even after accounting for many alternate explanations

If we use different DID specifications, we also get similar results.

0-.

1-.

2-.

3

2002 2004 2006 2002 2004 2006

Baseline Baseline + Alternate Explanations

Rel

ativ

e G

row

th

Note: Each panel displays implied impact plus 90% confidence interval.

By SpecificationImplied Impact of PNTR

Outline


• Data

• Baseline vs Extended Results

• Other results– Other Countries– Margins of Adjustment– Participation in trade by U.S. and Chinese firms– Plant-level

• Conclusion

35

Other Countries?

• The EU granted permanent NTR status to China in 1980– So, no annual renewals

• Dissimilarity of US and EU results indicates that the outcomes we observe in the U.S. are unlikely to be driven by – A productivity shock in China– A technology shock in industries that happen to have high gaps

• We can use employment from a different source – UNIDO – to compare the US and the EU

36

Overview of U.S. versus EUEmployment Data from UNIDO

37

.75

.85

.95

1.05

1.15

1996 2000 2004 1996 2000 2004

EU US

All Indusries

200

1=1

Source: INDSTAT4 available at http://www.unido.org/resources/statistics/statistical-databases/.

Manufacturing Employment

38

Overview of U.S. versus EUEmployment Data from UNIDO

.75

.85

.95

1.05

1.15

1996 2000 2004 1996 2000 2004

EU US

NTR Gap<Median NTR Gap>Median

200

1=1

Source: INDSTAT4 available at http://www.unido.org/resources/statistics/statistical-databases/.

Manufacturing Employment

DID regression analysis reveals that the post-PNTR differences are statistically significant for the US but not the EU

The dissimilarity of US and EU results indicates that US outcomes are not driven by: (i) a productivity shock in China (ii) a technology shock in industries that happen to have high NTR gaps

Outline


• Data

• Baseline results & Alternate explanations

• Additional results– Other Countries– Margins of Adjustment– Participation in trade by U.S. and Chinese firms– Plant-level

• Conclusion

39

Margins of Adjustment

• Job Destruction (JD)– PC: plant contraction at continuing firms– PD: plant death at continuing firms– FD: firm death

• Job Creation (JC)– PE: plant expansion at continuing firms– PB: plant birth at continuing firms– FB: firm birth

40

-.15

-.1

-.05

0

Cha

nge

fro

m P

eak

Yea

r

2001-2 2001-3 2001-4 2001-5 2001-6 2001-7

By Job Creation vs DestructionDecomposition of Implied Impact of PNTR

Job Desctruction (PC+PD+FD) Job Creation (PE+PB+FB)

Implied Impact of PNTR

41

Contribution of exaggerated job destruction

Contribution of anemic job creation

JC contributes 17 to 41 percent across 2001-2007

Relates to research by Faberman (2012) on “jobless” recoveries and the end of the “great moderation” after 2001

Outline


• Data



• Conclusion

42

Trade DID

• Trade data not available till 1990s

• So, amend DID to compare 2001-2005 to 1997-2001– 1st difference: products with higher vs lower NTR Gaps– 2nd difference: imports from China vs other U.S. trading partners

• Examine:– Value– Number of US importers– Number of Chinese exporters– Number of US-Chinese importer-exporter pairs

43

44

0.1

.2.3

.4G

row

th R

elat

ive

to R

OW

1. Value 2. US Importers 3. CHN Exporters 4. Pairs

Implied Impact of PNTR on US Trade

PNTR and U.S. Imports from ChinaImplied Growth 2001-2005 vs 1997-2001

Outline


• Data



• Conclusion

45

Outline


• Data



• Conclusion

46

Conclusions

• Strong link between US manufacturing job loss, US trade and PNTR

• U.S. imports from China surge in same industries where employment declines occur, along with number of U.S. importers, Chinese exporters and importer-exporter pairs

• Results are robust to inclusion of proxies for wide array of alternate explanations, as well as alternate specifications

• PNTR associated with both increased job destruction and decreased job creation

47

Thanks

48

The Surprisingly Swift Decline of U.S. Manufacturing Employment

Documents

Transcript of The Surprisingly Swift Decline of U.S. Manufacturing Employment