Since the 1970s, productivity growth in the manufacturing sector has outpaced the overall economy, yet the sector’s share of the workforce has declined dramatically. This leads us to ask if we are in fact engineering ourselves out of jobs. This Economic Commentary explores the relationship between productivity and employment and points out why this apparently straightforward relationship may be more complicated than it appears.Manufactures ; Employment ; Productivity

Mark Schweitzer

Saeed Zaman

English

Research Papers in Economics

Over the 1990s, service-sector firms
increased employment 25 percent,
whereas manufacturers lost about 
2.4 percent of their collective employ-
ment. Clearly, this aggregate result is
consistent with the story that greater
manufacturing productivity gains low-
ered employment from what it would
have been otherwise. Indeed, if the
desired amount of output from a sector 
is fixed, then productivity growth can
only come from employment declines.
But before we jump to this conclusion, 
it is helpful to look at data at the industry
level. This will help to refine our under-
standing of the 1990s productivity
boom, as well as to better assess the
impact of this boom on sectoral employ-
ment changes.
■ Productivity Growth in
Detailed Industries
We use the full detail provided by the
Bureau of Labor Statistics’Industry 
Productivity and Costs program—that is,
the 3-, 4-, 5-, and 6-digit codes of the
North American Industrial Classification
System (NAICS). These data provide
January 1, 2006
Federal Reserve Bank of Cleveland
Are We Engineering Ourselves out of
Manufacturing Jobs?
by Mark Schweitzer and Saeed Zaman
ISSN 0428-1276
Since the 1970s, productivity growth
in the manufacturing sector has out-
paced the overall economy, yet the 
sector’s share of the workforce has
declined dramatically. This leads us to
ask if we are in fact engineering our-
selves out of jobs. This Economic 
Commentary explores the relationship
between productivity and employment
and points out why this apparently
straightforward relationship may be
more complicated than it appears.
T he manufacturing sector has seen
sharp declines in employment of late.
These declines follow a decade in which
the sector saw only a modest employ-
ment drop, even as the service sector
experienced double-digit increases in
employment. What accounts for these
dramatically different outcomes? Many
observers point to productivity differ-
ences as the explanation.
A 2003 Washington Post article told the
story of how General Motors needed
nearly half a million workers about a
quarter-century ago to turn out five mil-
lion automobiles a year. Today, the com-
pany needs only about a quarter of that
employment level to produce the same
number of cars. In fact, during the 20-
year period from 1980 to 2000, U.S.
manufacturing output nearly doubled,
whereas manufacturing employment
remained flat.
Anecdotes like this one are common,
and they lend credence to the notion that
differences in the productivity of the
manufacturing and service sectors are at
the center of the differing employment
experiences. However, a closer look at
more detailed industry data reveals why
this conclusion may be misguided, and
why an apparently straightforward rela-
tionship between changes in productiv-
ity and employment may be more com-
plicated than it appears. In this
Economic Commentary, we focus on the
extent to which strong productivity
growth in detailed manufacturing indus-
tries is associated with weak employ-
ment growth, and thus with generally
weaker employment growth compared
to the service sector.
■ The Productivity Boom of 
the 1990s
During the 1990s, the United States
experienced a substantial boom in pro-
ductivity growth, particularly in the lat-
ter half of the decade. During the 1970s
and 1980s, productivity growth in the
overall economy rose an average of 
1.7 percent a year, but this rate had
nearly doubled by the end of the 1990s.
Manufacturing productivity growth rose
even more dramatically during the
1990s. Figure 1 plots the annual growth
rate of productivity in the manufacturing
sector (red bars) and in the overall econ-
omy (blue bars). (The nonfarm business
sector represents the overall economy
and the manufacturing sector is a subset
of it. Most nonmanufacturing businesses
in the nonfarm business sector are ser-
vice-sector firms.) From 1990 to 1995,
manufacturing productivity averaged 
1.7 percentage points higher than the
economywide average. Despite a strong
increase in overall productivity growth
during the second half of the 1990s, 
productivity in the manufacturing sector
continued to trend 1.6 percentage points
above the economywide figure.
The implication is that productivity
growth in the larger service sector must
be lower than in the manufacturing sec-
tor. The Bureau of Labor Statistics does
not actually make this calculation, partly
because the nonmanufacturing remain-
der of nonfarm businesses includes some
complicated categories such nonfinan-
cial, noncorporate businesses where pro-
ductivity is difficult to measure reliably.
Still, this has not prevented many ana-
lysts from concluding that service-sector
industries have had decidedly lower pro-
ductivity growth, if any.complete coverage of manufacturing
industries and about half the service-
sector industries (coverage of the service
sector is limited because of measurement
difficulties). In the service sector, the data
include all of the wholesale and retail
trade industries and some measure of
transportation, information, finance, real
estate, professional services, and admin-
istrative services. Service industries such
as education and most of the health 
services are excluded, but a reasonable
guess would put their productivity
growth rates near those of related 
service industries.
Figure 2 depicts the range of productivity
growth rates for detailed manufacturing
industries during the 1990s. The figure
charts the share of the manufacturing
workforce working in industries with a
given level of productivity growth. For
example, 12.5 percent of the manufactur-
ing workforce worked in industries that
achieved only 0.5 percent (±0.25 per-
cent) productivity growth per annum.
Interestingly, a careful look at the chart
reveals that most manufacturing indus-
tries (weighted by employment) did not
see the same sharp increase in productiv-
ity during the 1990s that was average for
the sector, 4.0 percent.
In fact, only about 20 percent of the
industries in the manufacturing sector
saw productivity gains at or above 
4.0 percent during the decade. Two indus-
tries in particular saw astounding growth
rates: computer and peripheral equipment,
and semiconductors and electronic 
components. In these cases, advances 
in chip technology are widely acknowl-
edged as having driven the dramatic pro-
ductivity gains in the semiconductor sec-
tor and, in turn, the computer equipment
sector. (These gains illustrate Moore’s
law: the ability of the semiconductor
industry to double the processing speed of
computer chips every 18 months.) Figure
2 shows us that these two industries were
instrumental in pushing up the average
level of productivity growth in the manu-
facturing sector.
A more typical gain can be seen in cut-
lery and hand tools manufacturing,
which had an annual productivity
increase during the 1990s that was
roughly at the median among manufac-
turers, about 2.3 percent. Though this is
an impressive rate, it is still well below
the 4.0 percent average reported for
manufacturing during this period.
Figure 3 shows the distribution of pro-
ductivity growth rates across service-
sector industries from 1990 to 2000,
again weighted by share of employment.
These figures range from –2.6 percent to
17.6 percent. On the low side, we see
industries such as drinking places 
(–1.8 percent) and specialty food stores
(–1.5 percent). These industries illus-
trate the standard reasoning for the 
service sector’s lack of productivity
growth: The level of service that 
customers expect in these industries
requires a fairly fixed amount of labor.
On the high end, commercial equipment
wholesalers (17.6 percent) and electronics
and appliance stores (14.1 percent) led the
way. Consolidation into physically larger
stores is one obvious explanation for these
exceptional productivity growth rates, but
it turns out that employment levels did not
decline in these industries. During the
same period, employment actually
increased in the software publishing and
wireless telecommunications sectors by
10 percent and 18 percent, respectively,
with attendant productivity increases of
15.3 percent and 7.6 percent, respectively.
Most interestingly, the median increase in
productivity among service-sector indus-
tries during the 1990s was essentially the
same as the median rate recorded by
manufacturers. Although the average
was, in fact, lower for service-sector
industries than for manufacturers during
the 1990s, this difference was almost
entirely the result of the remarkable per-
formance of the computer and semicon-
ductor industries. Significantly, the high
levels of productivity growth within these
two industries should not have directly
altered employment in other manufactur-
ing industries. Productivity growth in
most manufacturing industries was
remarkably similar to that of the service
sector, at least within its easily measured
portion. Employment growth, however, 
was considerably weaker within the
manufacturing sector.
■ Industry Output and
Employment Growth
The foregoing analysis seems to weaken
the conventional case that strong pro-
ductivity growth dampened increases in
employment in the manufacturing sector
during the 1990s. So just what can we
say about the relationship between pro-
ductivity growth and employment
change? Productivity is defined simply
as the amount of output for a given
quantity of labor. Accordingly, in a sim-
ple sense, increases in productivity must
reflect either an increase in output for a
fixed amount of employment or a
decrease in the amount of labor required
to produce a fixed amount of output. (Of
course, both the amount of labor and
output could change at once.)
FIGURE 1 MANUFACTURING PRODUCTIVITY
0
2
4
6
8
10
1990 1992 1994 1996 1998 2000 2002 2004
Annual percent change
Manufacturing
Nonfarm business sector
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics, Division of
Industry Productivity Studies; and Federal Reserve Bank of Cleveland calculations.Output Growth Employment Growth
Manufacturing Services Manufacturing Services
1990–2000 0.90 0.84 –0.08 0.24
1990–1995 0.86 0.77 –0.16 0.07
1996–2000 0.86 0.86 –0.05 0.30
2000–2003 0.66 0.76 0.07 –0.05
1990–2000a 0.57 0.84 –0.21 0.24
Using a simple correlation analysis, 
we can determine, industry by industry,
whether increases in productivity
resulted more from increases in output
or decreases in employment. If produc-
tivity growth was perfectly associated
with employment reductions, then the
correlation between employment
growth and productivity growth would
be –1. If productivity growth is always
associated with increasing output and a
fixed level of labor, then the correlation
between output growth and productivity
growth would be 1.
Table 1 shows the results of this correla-
tion analysis for several time periods. We
find that productivity growth in both ser-
vices and manufacturing is associated far
more with output growth than it is with
employment reductions. From 1990 to
2000, the correlation between output
growth and productivity growth was 
0.90 for manufacturing and 0.84 for 
services. Over the same period, the 
correlation between employment growth
and productivity growth was –0.08 for
manufacturing and 0.24 for services. 
An employment correlation near zero
indicates that a firm was nearly as likely
to have increased employment as it 
was to have reduced it over this period
regardless of how its productivity
changed. Again, this is true in both ser-
vices and manufacturing, even though
manufacturing gained few workers dur-
ing the 1990s, whereas service-sector
employment expanded 25 percent.
FIGURE 3 SERVICES PRODUCTIVITY
GROWTH, 1990–2000
TABLE 1 CROSS-SECTIONAL CORRELATION WITH 
PRODUCTIVITY CHANGE
a. Excludes semiconductors and computer and peripheral equipment.
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics, Division of Industry 
Productivity Studies; and Federal Reserve Bank of Cleveland calculations.
FIGURE 2 MANUFACTURING 
PRODUCTIVITY GROWTH, 1990–2000
0
–6 –3 0 3 6 9 12 15 18 21 24 27 30
4
8
12
16
20
24
Growth rate (annual average)
Percent of employment
Computer and peripheral equipment
Wood products
Communications equipment
Mean is 4.0%
Semiconductor equipment
Median is 2.3%
There are examples of industries that
increased their efficiency primarily
through labor reduction. Electronic
instrument manufacturing is one: 
Over the 1990s, employment in this
industry fell 2.6 percent while  output
rose just 1.3 percent per year. How-
ever, the other extreme exists as well,
even among old-line manufacturers. In
motor vehicle bodies and trailers, for
instance, productivity rose 2.9 percent
while employment increased nearly
3.6 percent.
Overall, these data suggest that produc-
tive industries tended to have more 
output growth than employment reduc-
tions. This result is remarkably robust
and holds true regardless of whether we
include the unusually high productivity
growth rates seen in computers and
semiconductors in the analysis. Fur-
thermore, this conclusion is true for
both the early 1990s and the late 1990s
and even for the period from 2000 to
2003, which includes the most recent
recession.
■ Conclusion
By definition, the recent high rates of
output growth with little increase in
labor imply strong productivity growth.
But can strong productivity growth
directly explain the long-run weakness
of manufacturing employment? Not in
0
4
8
12
16
20
24
–6 –3 0 3 69 12 15 18 21 24 27 30
Growth rate (annual average)
Percent of employment
Specialty food
stores
Mean is 2.6%
Commercial equipment
Median is 2.3%
SOURCES: U.S. Department of Labor, Bureau of Labor Statistics, Division of Industry Productivity Studies; and Federal Reserve Bank of Cleveland calculations.Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland, OH 44101
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material to the editor.
Mark Schweitzer is an assistant vice presi-
dent and economist at the Federal Reserve
Bank of Cleveland. Saeed Zaman is an eco-
nomic analyst at the Bank.
The views expressed here are those of the
authors and not necessarily those of the Fed-
eral Reserve Bank of Cleveland, the Board of 
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its staff. 
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any important sense. Changes in produc-
tion technologies do alter both 
measured productivity growth and firms’
desired employment levels, and ulti-
mately they allow the economy to grow
faster than its labor resources. However,
the amount of labor required in an indus-
try also depends on how consumers
respond to prices: If consumers suffi-
ciently expand their consumption of a
product as the quality-adjusted price
falls, then the new technology can
increase employment levels. This is 
difficult to predict a priori, but the data
over the last decade show this scenario is
relevant and occurs often enough. It turns
out to be largely a coin toss whether
high-productivity-growth manufacturers
added or lost employment in the 1990s;
the same holds true for low-productivity-
growth manufacturers.
From this perspective, the long-run
decline of U.S. manufacturing employ-
ment is just as much the result of declin-
ing consumption of manufactured goods
produced in the United States as a share
of total income. As recently as 1990,
roughly 30 percent of U.S. gross pur-
chases were domestically produced
goods, whereas 52 percent of purchases
were domestic services. Now, only 
25 percent of U.S. purchases are
domestically produced goods. About
half of this decline is attributable to the
rise of imported goods, but the rest is
simply the result of greater consump-
tion of services, which likely reflects a
change in consumption preferences. 
This Commentary is in no way a full
accounting of the factors that determine
employment levels. Other factors, such
as our export volumes and lower interest
rates as a result of associated capital
flows, are also important. However, it
suggests that factors other than produc-
tivity changes can and do have important
implications for employment growth.

Are we engineering ourselves out of manufacturing jobs?

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Are we engineering ourselves out of manufacturing jobs?

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