The case for a dynamic economy.

• Author: Henderson, David R.

Many people worry that the decline in U.S. manufacturing employment is a sign of U.S. economic decline. That worry is understandable, but a closer look shows that the loss of manufacturing jobs is a sign of economic health.

Here are the facts. In July of this year, 144.6 million Americans were employed in manufacturing. This is a 17 percent decline from the peak of 17.6 million in March 1998. But over that same period, manufacturing output actually grew slightly, even with a recession in between. How could that be? Simple. Productivity in manufacturing--output per worker--grew substantially. In other words, we are making more goods with fewer workers.

Isn't manufacturing falling as a share of gross domestic product (GDP)? Yes. And, as my Hoover colleague Robert Hall pointed out in recent congressional testimony, it has been falling fairly steadily since 1947. The reason is that the tremendous productivity growth in manufacturing has caused prices of manufactured goods to fall relative to prices of health care, education, and other services. So even though manufacturing output has risen, GDP accounts value this output at market prices, which have been falling. You are not worse off because you can buy two televisions for the same amount (inflation adjusted), that you would have paid for one lower-quality television twenty years ago. You are better off. In fact, the declining prices of manufactured goods are one of the main reasons per capita income and wealth have grown so much since World War II.

One consequence of increased productivity, of course, is loss of manufacturing jobs. That is a hardship for workers who were previously employed...