Tax Reform May Not Bring US Jobs Back

Technology and ever-growing productivity – not outsourcing – are the main culprits behind declining jobs in the United States. The US president has proposed revising tax policy to encourage companies to apply growing profits to factories and research inside the US. But manufacturing is going the way of agriculture; fewer workers producing more. “Because of automation and technology, each factory worker produces about four times as much per hour as 30 years ago,” explains economist David Dapice. Many US firms are earning more revenues in foreign markets than at home – and such earnings are subject to US taxes only when repatriated. Confronting a 35 percent corporate-profit tax rate, companies tend to keep those profits offshore. Previous tax-amnesty programs on corporate stashes contributed to more dividend checks for investors and stock buyouts than job creation. Productivity irrevocably eliminates some jobs – unless consumers are willing to pay higher prices by retaining low productive labor – so economies of the US and other nations are in a new era. – YaleGlobal

Tax Reform May Not Bring US Jobs Back

Rising productivity, not taxes, is behind drop in US manufacturing jobs
David Dapice
Friday, February 3, 2012

Fighting a historical trend: With manufacturing in decline, American workers demand to keep it home

MEDFORD: Protectionist-sounding noises coming from the United States may raise concerns abroad, but are not unusual in an election year. A closer look reveals more bark than bite.

President Barack Obama in his State of the Union address proposed adjusting the tax code to boost manufacturing employment. In particular, he hopes to encourage US companies to maintain US manufacturing jobs and bring back manufacturing jobs that have already moved to foreign countries. With manufacturing jobs part of the recent modest job recovery, this is a plausible idea. Tax reform is needed, but the adjustment likely won’t make a major difference in the overall job picture.

The fact is manufacturing is going the way of agriculture. Farming long ago accounted for most of the workforce and output, but growing productivity reduced the need for workers. Even with exports, productivity growth outpaced demand. By 1900, 40 percent of all jobs were in agriculture. While the US now produces more food and fiber than ever, agriculture represents 1.5 to 3 percent of output and jobs. There may be a slight uptick in farm jobs, but fundamentally agriculture is and will be a small part of the overall economy, despite gains in biofuels.  Service jobs now account for almost 90 percent of the total.

US manufacturing employment has declined sharply since 1979, when total jobs hit 21 million – they now number less than 12 million – with most of that decline coming since 2000. The share of manufacturing jobs in the total labor force also fell from 22 percent to 9 percent. Real manufacturing output has risen, more than doubling from 1979 to 2007, though still falling as a share of output from 21 percent to 11 percent. While the US trade deficit in manufactures added to the long-term downtrend in jobs, it was not the major cause. The main driver for job loss was increased productivity. Because of automation and technology, each factory worker produces about four times as much per hour as 30 years ago. Even if manufacturing of selected products returns to the US, relatively few jobs will be added. Productivity growth in manufacturing continues to improve, faster than growth in the overall economy.

The US trade deficit soared since 1990 and peaked in 2006 before falling back by a few hundred billion dollars. Much of the deficit is in manufactured goods, but the trade deficit in manufactured goods is only 7 percent of US factory sales. Increasing manufactured exports enough to balance imports would produce no more than 1 million extra jobs, a small fraction of manufacturing job losses since 2000.

Why has there been a rise of 300,000 workers in manufacturing since 2009, after a loss of 2.3 million,  from 2007 to 2009? Major reasons include a weak dollar making US products competitive, rising Chinese wages, depressed US wages, higher US factory productivity, and rising transport costs, which prompted relocation of factories closer to markets.

Despite the modest rise in manufacturing, prospects for robust job growth remain remote for a variety of reasons, one being current tax policy. Some claim that US profit tax imposed on profits earned anywhere in the world has negatively affected domestic manufacturing as money earned abroad – and quite a bit of multinational profits earned anywhere can be made into foreign profits – is not subject to US taxes unless repatriated. Thus many large US companies have billions of dollars offshore and not yet paid taxes on these profits. This is legal.

Any company that does not need to repatriate funds will think twice before doing so, since the corporate-profits tax is 35 percent. Few companies involved in foreign investment actually pay that much – GE famously paid almost nothing in corporate taxes in in 2010. More generally, the average effective tax rate for all corporations is 25 percent, but that includes domestic firms with limited abilities to shift profits abroad. Corporate lobbyists are proposing a temporary tax amnesty for companies repatriating profits.

One such amnesty – with a 5.25 percent tax rate, not a zero rate – was offered in 2004 and another is proposed now. Research on the 2004 amnesty indicates that very little of the repatriated profits were used to invest in new plants and equipment. Most of the money was used to increase dividends and stock buybacks. Though overseas assets of the top 20 multinationals fell from $270 billion to $152 billion after the 2004 amnesty, foreign assets of those companies had risen to $427 billion by 2010. The combination of a highly avoided corporate tax rate with little job or investment gain from tax amnesties suggests that the system needs a fundamental overhaul.

Obama’s proposals to impose worldwide tax on all multinational activities and give tax relief to those that invest in the US are less of an overhaul and more a patch on a flawed system. His plan would run into problems with credits for taxes imposed by other jurisdictions. Transferring any revenues gained to domestic manufacturing would add complexity to an already baroque system. There would be more work for tax experts who find ways to avoid taxation. In any case, legislative action this year seems unlikely.

Whatever measures make it through the legislative quagmire in a deadlocked US Congress, the positive impact will likely be a small fraction of the jobs lost during the 2007-09 period. The biggest single or multiyear increase in manufacturing jobs during the last 50 years was 1 million jobs – and research has shown that tax policy has less effect than productivity, wages or exchange rates.

Increasing overall demand and controlling costs relative to competitors will remain the primary drivers of changes, though innovation can also play a role – the Apple iPad or Boeing 787 sell in part because of technical excellence and design, not merely price. Apple does not manufacture much in the US, but most of the design and marketing is done there. If the US has a comparative advantage – real profitability – in manufacturing, it is probably in cutting-edge production that requires high levels of skill and engineering.

A point sometimes forgotten is that manufacturing jobs have transformed. In the “old days” – just 35 years ago – unions often bargained for higher wages and benefits, but their leverage has declined sharply.  Due to pressures of globalization and competition, outsourcing and temp work, only 7 percent of workers in the private sector are unionized now, down from 39 percent in 1973.  Wages of new auto factory hires are $16 to $19 an hour, barely more than half of previous real wages. Even when jobs are created, they pay less than before. Of course, these jobs are better than no jobs, but they don’t deliver nearly as good a wage as in the 1970’s.

Changing the tax system won’t deliver much in job gains. Long-term trends will continue to push up productivity through automation and reduce factory employment. A reduction in the manufactured goods trade deficit would help replace a fraction of the jobs lost in the past decade but not reverse the trend. Employment gains for the 13 million unemployed, and 10 million more who are underemployed or discouraged, will mainly come in service sectors that now account for most US employment. Manufacturing output can grow faster than it did a few years ago, but the country can’t expect a return to the days of plentiful jobs for high-school graduates with good wages and benefits. However painful it might be a page has been turned.


David Dapice is associate professor of economics at Tufts University and the economist of the Vietnam Program at Harvard University’s Kennedy School of Government.

Copyright © 2012 Yale Center for the Study of Globalization