Is the decline in manufacturing employment due to trade competition? Insights from a decomposition.
Figure 1: Employment change from 1997Q1 (black line), change attributable to output change (blue bar) and attributable to productivity change (tan bar). Calculations based on log differences. NBER defined peak-to-trough recession dates shaded gray. Source: BLS Employment and Costs release, NBER, and author’s calculations.
This decomposition works off of the identity:
h ≡ y – (y-h)
where h is (log) hours in manufacturing, y is real value added output in manufacturing, and (y-h) is value added output per hour.
The graph shows that, while the employment loss during the 2001 recession is due to output reduction — in a Keynesian framework, a decrease in aggregate demand. However, the subsequent job loss is due to rapid productivity growth.
Does this mean that the job loss is not due to trade? Not necessarily; labor productivity growth is not exogenous. Increased import competition might induce accelerated productivity growth. In addition, increased offshoring as specialization breaks up value chains should increase productivity (that is, there is specialization in tasks).
So, while I can’t dismiss international trade as the key reason for reduced manufacturing employment, the decomposition is suggestive that one has to be careful about attributing the bulk to international trade.
Off topic, but a continuation of yesterday’s comments about yield spreads.
First of all, thanks to Prof. Chinn for posting the link to Shiller’s historical interest rate data.
Based on that, I did go back and take a look at Shiller’s annual 10 year Treasury bond data from 1871-1900, and compared it with his “1 year interest rate” data for the same years, as well as the NY commercial paper data, which I averaged annually as well.
In all but three years during the entire period, 1 year interest rates were higher than 10 year Treasury rates. The same was true with only one exception in the comparison with commercial paper interest rates. The reason for the latter is presumably that we are comparing corporate paper with government paper, and government paper is almost always going to command a lower interest rate for obvious reasons having to do with the likelihood of default. I suspect Shiller’s 1 year interest rates are also corporate bond rates, but I don’t have access to the book that he cites as his source.
I won’t bore people with the spreadsheet, but although very little can be gleaned from annual vs. quarterly or monthly data, one thing that does stand out is that the spread between commercial paper and long term Treasurys did increase, usually sharply, in the year just before or the first year of recessions during that era. So while we apparently can’t use a rubric of inverted vs. normal yield spreads, the *relative* yield spreads still had forecasting utility going back into the 19th century (and have continued to the present, albeit noisily).
Apropos of which, as of last month, the spread between corporate bonds and 10 year Treasurys was at its lowest level since the pandemic.