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Grandpa’s Job

Understanding the changes that have taken place in our economy over the last two generations helps us to understand the nature of the Depression or near Depression we are in now.  The most important reason for this is that the way out of a economic downturn is a restructuring – allocating energy and money to something that has a real value to the world.  Think of it as a chance to go to our rooms and think about what we’ve done and what we’re going to do different in the future.  The other reason is that as we look to the last Depression for guidance as to what we should be doing, there are obvious limitations caused by the simple fact that things have changed.

I had a lot of comments from friends on my piece, “Build a Better Tomorrow”, outlining how the loss in manufacturing has caused income disparities.  I argued that the declining share of manufacturing in our economy maps very well with the relative loss of income of the working Middle class.

The best criticism I received was that I should look at jobs, not share of GDP.  That’s very good advice, though I wish it came in the comment section so that other smart people could respond (hint).  I will do that now in this complicated looking graph of data from 1959 to 2006:


Once again, I will look at only Manufacturing, Finance, and Service sectors – the rest aren’t all that useful.  The lighter lines show the share of total jobs for each of these, as a percent of the total.  The darker lines are the share of GDP, which is the same data as before.

The first thing you’ll see is that these sectors are totally different in their behavior.  The share of manufacturing jobs and GDP form two lines that move together, meaning that each manufacturing job creates a share of GDP that’s very average over the whole economy.  The service sector explodes over this period, going from 20% of all jobs to 40%.  I should note that “service” includes health care, education, and anything that is involved with people taking care of other people for money; these aren’t all low paying jobs.  Finance nearly doubled its share of the economy, from 13% to 22%, but the share of total jobs hardly changed.

What does all this mean?

More and more people are employed in services, and the amount of income this sector generates per employee is less than the overall average.  That puts constant pressure on wages.  However, pay for service sector jobs recently passed wages for manufacturing on average, probably because higher paying services such as education and health care are growing faster.  Something is clearly out of whack.

The increase in the financial sector without much of an increase in the share of jobs is a tremendous increase in efficiency likely caused by computerization.  But it clearly shows that a greater share of the economy is relying on passive income – money received for manipulating money, not doing work.

At some point, any argument like this has to ask, “What is GDP?”  It’s nothing more than the total value of all the goods and services the economy is creating.  That has to be done at market value, which is to say what people are wiling to pay for it.  The increase in the value of all the services created ultimately has to be tied to the increase in passive income, especially since we have such a sharp decline in manufactured goods.  That leads directly to how an entire economy can increase its passive income without receiving it from abroad, since someone has to be paying it.

No matter how you think through this, our economy was ultimately based on someone else’s wealth or labor supporting us.  The major growth over the last two generations came from increased reliance on finances with almost no change in the number of jobs that were created.  Job growth came from services, and the demand for these has been so strong that there has been upward pressure on wages.

As we move forward, it’s clear that the passive income that supported our economy will not return; it is the sector that is melting down the most dramatically right now.  That will likely mean a reduction in demand for services as well.  The potential for job and income loss is significant given a likely return to a more typical downward pressure on wages in the service sector.

Restructuring this, which is to say adjusting to the new economic reality, will be painful.  But it cannot be avoided.  The Obama administration has focused on re-starting the financial sector, which makes sense, but it is unlikely to return to the same share of GDP it once held.  The services that were made possible by its previous largess will be unsupportable.  Once the worst of the financial situation is over, the administration will have to concentrate on keeping people employed – or at least fed.  Somewhere in here we’ll develop the economy that comes after the one pictured above has changed completely.

38 thoughts on “Grandpa’s Job

  1. Good start and good ending. Why is/was retail considered unorganizabe/ununionizable? Walmart (which has probably had a good effect for most low wage incomes)? It can be debated both ways by serious academics.
    In Europe retail jobs are highly sought after because the working conditions are quite pleasant there and there has been some anti immigrant backlash there when immigrants stay and move up the ladder and don’t go back home . They have better social government support there.

  2. I left off retail because, strangely, it doesn’t seem to have changed much. It was 11% of GDP in 1947 and 10% in 2006. I don’t have employment percentages because, I think, it was folded into service – but I’m not sure. Since it hasn’t changed much as a share of GDP, I doubt it’s changed much as a share of employment.

    That’s not to say it hasn’t changed, but the bulk change in our economy doesn’t register.

  3. I think it’s absolutely shocking that so much of our economy is Service. No wonder we’re having a depression! I can’t believe it got this bad.

    You’re trying to show how things are and letting us draw our own conclusions, I know. But you know as much as anyone that the conclusions are obvious. How do we “make stuff” again?

  4. Excellent graph. Other things to consider teaching and health care are often public expenditures and one of the last places to remain unionized. Also hospitality often promoted as a cash benefit for small towns, B&B, resorts, travel, the u.s. world economy has changed so much in the last 30-40 years. Hospitality also includes skiing, snowmobiling, golf, hunting. My rancher uncle once got a payment in kind of one or two 99% new atvs. He uses them almost every day “its better than a horse”.

  5. There is quite a lot going on here, but I’ll try to restrict myself to a few related thoughts.

    First, loss of manufacturing jobs or mfg-based sources of wealth get a lot of lip service and have an intuitive appeal – tangible items as signs of tangible wealth. But it misses a huge components of wealth — previously existing manufactured goods. My house was built decades before I was born. Aside from some small repairs (services) my biggest object of wealth was transmitted to me through realtors and banks (FIRE). My other material, tangible wealth, (i.e. that which was manufactured) is tied up in furniture, appliances, technology and personal items like clothing and books. Almost all of that is durable goods (you should make a joke about clothing here). Traditionally, most adults do most of their acquisition in a narrow time frame — they move away from home, marry & have children and acquire a lot in that time. We’re not a young country anymore, nor are our citizens. Each generation doesn’t have to reproduce the physical infrastructure previous generations did. Older adults’ needs become more service related. Boats, McMansions, and extra cars may be manufactured for these older Americans, but is that the economy we want to expand? They don’t increase health, education, productivity and you can’t eat them.

    Second, a lot of manufacturing jobs got sent elsewhere, but a lot just went away due to technological improvements. For many of them, we should say good riddance. They were tiresome monotony with little reward financial or otherwise.

    Passing around greasy little pieces of paper and bidding up the bubble of the day certainly doesn’t enhance our well-being as a nation, but manufacturing for the sake of manufacturing isn’t the answer either.

  6. Bruce I mostly agree with you our appliances are much better. I remember some of the old furnaces, fridges, and washer/ dryers. I mean really who irons anymore? And our cars got better with fuel injection, better tires, better steel and substitutes. Homes have gotten better with windows and and insulation. These are all heavy large durable goods and I think it is foolish for us to think that Americans are so different or so much better that nobody should do heavy work. As transport costs escalate and labor mobility changes we will see what happens.

  7. Bruce, you’re exactly right. That’s why I’m so slow to say, “We have to have more manufacturing in the US!” outright. There are key advantages to manufacturing jobs and there the decline of manufacturing has a lot to do with the perilous position we’re in. BUT – that doesn’t mean we should start pumping out cheap stuff that China has gotten a rep over.

    What I’m doing here is listing what I know – that ultimately we have to make something and that there have been a number of policy changes over the years that have made this more difficult. What to make? I’m not there yet.

    I like the fact that you started down that road, BTW, and you have some good starts. Obama is thinking this way, too. But I want the groundwork established so that people know why we’re doing this.

    Thanks a bunch!

  8. T he WSJ had an excellent article on new technologies on traffic flow, electrical flow, water leakage. Also Bridge meters apparently the new 35W bridge has over 300 meters on it to report on a wide variety of functions. Probably some old bridges could be retrofitted.


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  18. Note that the agricultural economy suffered the same fate as the ensuing manufacturing economy. A few gadgets here, a few electric contraptions there, pretty soon the economy had to call itself something else.

    Don’t think for a minute that the service sector is immune to this.

    Can the people of the future get over living most of their lives without jobs?

    Doesn’t seem like that much of a social, self-worth, hurdle to me.

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  22. Small appliances necessary for all the efforts necessary for the work necessary for the house takes. I am also extremely efficient and cost-effective and instrumental in reducing fatigue and stress. Their small size, minimal power consumption and a reasonable price makes them an irresistible deal any time a new device on the market. While the house can be full of these places points conveniently located close to sale of electricity, making the workload easier.

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  28. I just read Eric’s “Empire” post from ’08. (https://erikhare.wordpress.com/2008/03/20/generations-empire/). This is excellent, thoughtful stuff. One only has to think about the long-term fates of the Spanish, Portuguese, or British empires to get some hints of the longer-term implications.

    The US has great resources, as you say, but not infinite ones. We are dissipating them in maintaining an empire that doesn’t really benefit us. What would be the consequences if we took the money spent on importing petroleum and maintaining a bloated military establishment, and invested this in health care, infrastructure, and clean low-carbon energy?

    I expect Obama understand this, but isn’t, or doesn’t feel, strong enough to make serious policy changes. He only nibbles around the edges. No wonder people are frustrated.

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