Creative destruction and globalization.

• Author: Grennes, Thomas

Employment in the U.S. textile and apparel industries has been declining for more than a quarter of a century. Employment reached its peak in 1973, and since then it has declined by 57 percent in textiles and 63 percent in apparel through March 2002. Total employment also decreased in the steel and automobile industries and in the broader manufacturing sector over the same period. These employment figures from particular industries and a single sector of the U.S. economy might leave the mistaken impression that the entire U.S. economy has been shrinking. On the contrary, this extended period was one of extraordinary prosperity in which total employment in the country grew by 71 percent, worker productivity (including textiles, steel, and autos) grew by 57 percent, and income per capita grew by 72 percent. Declining employment in certain traditional industries did not prevent increasing affluence for the average American. These contradictory employment experiences for textiles, steel, and autos and for the general economy represent the forces of what Joseph Schumpeter (1934) called "creative destruction." Innovations that stimulate general economic growth simultaneously destroy specific jobs as emerging technologies replace older technologies. Creative destruction has gotten more attention recently because it is a major component of globalization, and many prominent job losses have been attributed to import competition.

During this period 1.5 million jobs were destroyed in textiles and apparel, but total employment in the economy grew. For each textile job eliminated, 36 more jobs were created in other industries. Employment in the U.S. steel industry declined by 361,000 during the period, but more jobs were created elsewhere. The new jobs created did not all require the same skills or have the same location as the old jobs, and workers had to acquire new skills and migrate to new locations to get new jobs. At the same time textile employment was falling in the major textile producing state of North Carolina, there was a large net migration to the state from other states and from other countries. Many workers entered occupations that did not exist previously and produced newly invented goods. Some displaced workers with poor alternatives had to accept lower wages in their new jobs, but wages and productivity for the average worker increased substantially. For each $1 lost by workers who were hurt, other workers gained more than $1. Goods became more abundant and income per person rose precisely because less labor was necessary to produce each unit. Wages of unskilled workers did fall relative to those of skilled workers, but this change in relative wages revealed new information about the increase in demand for skilled workers, and it provided a powerful signal to unskilled workers about the payoff from acquiring additional skills.

Merely counting the number of jobs destroyed in an industry without also taking account of the additional goods made possible by an innovation can be very misleading about the effects of economic changes. It confuses means (jobs) and ends (goods and services). For example, automatic dishwashers do the work that could have been done by workers using their hands. Is the destruction of millions of hours of hand dishwashing jobs a tragedy? In periods of rapid innovation, such as the recent episode of globalization, economic growth accelerates, but so does the rate of destruction of certain jobs and creation of other jobs (Caballero and Hammour 2000). Simply adding up the number of jobs destroyed misses the benefits from accelerated economic growth. Politicians and the popular press focus their attention on jobs destroyed or jobs threatened by economic change, but this emphasis on "destruction" of old jobs misleads the public about the "creative" aspect of creative destruction and its contribution to economic growth. Policies that protect traditional jobs and technologies from innovation interfere with enhancement of worker productivity that contributes to better jobs and higher income.

Sources of Economic Growth

The main sources of economic growth are technical change, investment, and trade, but these variables often interact with each other. Investment and trade are frequently the channels through which new technology is introduced into an economy. For example, a technical innovation may be a new method of production, but the method cannot be implemented without investment in new plant and equipment and human capital. Similarly, the new technology may be introduced in one country, but transmission to other countries may require trade or international investment. These innovations increase worker productivity and make it possible for industry employment to decrease at the same time industry production is increasing. Movement of workers from lower to higher productivity jobs is an integral component of creative destruction and a major source of economic growth (Caballero and Hammour 2002).

From 1973 to the present, world steel production increased at the same time there was a large reduction in world steel employment as a result of a tripling in steel output per worker. In U.S. agriculture, more than six million jobs were destroyed in the 20th century, but increased worker productivity made it possible to feed a domestic population that grew by more than 150 million people, while continuing to be the world's largest agricultural exporter. The invention of the automobile destroyed many jobs related to producing and servicing horses and buggies. In 1900, 109,000 people were employed in the carriage and harness industry, and there were 238,000 blacksmiths. Current employment in those activities is negligible, but the introduction of automobiles, trucks, tractors, and other motor vehicles has had a major effect on the productivity and mobility of workers in many industries. It also created entirely new occupations related to designing, producing, marketing, and servicing vehicles. More recent innovations in technology and trade have made it possible to provide food, clothing, and transportation for consumers by using less labor per unit than in the past. As a result of productivity improvement, labor has been released to produce other goods that are in greater demand, including entirely new goods.

Some innovations reallocate workers across industries (for example, automobiles versus horses and buggies). However, some important innovations reallocate workers across firms within the same industry. In a growing economy new jobs are being created by innovative firms at the same time old jobs are being destroyed at less innovative firms and plants in the same industry. The churning of the labor market can be seen from recent plant-level data on gross job creation and job destruction in textiles and apparel since 1972 (Livingston and Metropolis 2001). Although total employment has declined for decades in both textiles and apparel, the two industries have been quite different in terms of rates of technical innovation and investment. Textile mill production has been more amenable to technical change, and more investment has occurred than in apparel. At the same time some textile plants were laying off workers or shutting down, other textile plants were opening using new technology and hiring new workers. The apparel industry has been more labor intensive and less amenable to technical innovation. Apparel plants spent less on investment, created fewer new jobs, and have been less competitive in the world market. The United States is a net importer of both textiles and apparel, but net imports are much greater and have increased faster for apparel. Greater innovation by U.S. textile producers has allowed them to be more competitive for certain types of products. As a result, the United States is one of the 10 largest gross exporters of textile mill products, even though it is a net importer of textile products.

Technical Change, Trade, and Employment

Some people (for example, spokesmen for the U.S. steel or textile industries) accept technical change as a legitimate and desirable way to promote economic growth, but they oppose imports because trade is said to destroy domestic jobs. Representatives of certain U.S. textile firms (for example, Roger Milliken) contradict themselves by advocating and implementing labor-saving technology (i.e., destroying textile jobs of American workers) at their U.S. plants, while at the same time urging the government to restrict textile imports that destroy textile jobs. Technical change and trade both destroy particular...