Accounting for the Secular 'Decline' of U.S. Manufacturing

FRB San Francisco Working Paper No. 2005-18

32 Pages Posted: 7 Dec 2005

See all articles by Milton H. Marquis

Milton H. Marquis

Florida State University - Department of Economics

Bharat Trehan

Federal Reserve Bank of San Francisco

Date Written: September 2005

Abstract

The share of employment in manufacturing as well as the relative price of manufactures has declined sharply over the postwar period, while the share of manufacturing output relative to GDP has remained roughly constant. Household preferences turn out to play a key role in reconciling this behavior with a closed-economy, two-sector model with differential rates of productivity growth. We show that the data imply that households are not willing to substitute between the two goods at all and also that this inference is independent of whatever the income elasticity of demand for services might be. Because we are unable to account for the entire decline in employment over this period, we expand the model to allow for manufactured exports. While this does not change our estimate of the elasticity of substitution, it does improve the model's ability to explain the decline in relative employment in the 1990s. However, larger errors in the 1970s remain unexplained.

Keywords: Manufactures, employment, productivity

Suggested Citation

Marquis, Milton H. and Trehan, Bharat, Accounting for the Secular 'Decline' of U.S. Manufacturing (September 2005). FRB San Francisco Working Paper No. 2005-18, Available at SSRN: https://ssrn.com/abstract=864464 or http://dx.doi.org/10.2139/ssrn.864464

Milton H. Marquis (Contact Author)

Florida State University - Department of Economics ( email )

Tallahassee, FL 30306-2180
United States

Bharat Trehan

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

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