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Friday, March 1, 2002

“We Can’t Get Rich Doing Each Other’s Laundry”

What Would Happen If America Lost Its Manufacturing Sector?

Since World War II, manufacturing employment as a fraction of total employment has declined steadily. In the middle of the war, it was over 40 percent of the work force. By 1966 it dipped below 30 percent for the first time. By 1985, it dropped below 20 percent for the first time.

In 2000 there were just over 18 million jobs in the manufacturing sector–a mere 14 percent of total nonfarm employment.

Should we be alarmed at the continuing decline of the manufacturing sector as a source of employment? Those who are alarmed argue that manufacturing jobs are the good-paying jobs. The alternative to manufacturing jobs are service jobs, which have a less than stellar reputation. Ignoring fringe benefits, the average manufacturing wage is slightly higher than the average wage in the service sector.

I recently heard a new slogan arguing for the importance of manufacturing jobs over service jobs: “We can’t get rich doing each other’s laundry.”

Isn’t that a great slogan? It conjures up a frightening future of an America without manufacturing jobs and the great masses of us stuck doing the most menial of tasks at subsistence wages.

I can think of lots of variations on this theme: We can’t get rich selling each other cosmetics. We can’t get rich flipping hamburgers for each other. We can’t get rich chopping firewood for each other. And so on.

So is there any economics in any of these slogans? Are they legitimate warnings of the fate that awaits us as we slough off manufacturing jobs en route to a pure service economy?

It’s worth noting that we probably can’t get rich doing each other’s laundry. That’s what makes the slogan so clever–it’s probably true.

What’s false about the statement is the implicit assumption that if we’re not careful, we’re going to lose all our manufacturing jobs and have them replaced with service jobs. There’s an additional implicit assumption that if we ever do lose or choose to shed our manufacturing jobs, then the service jobs that remain will be menial and low-paying.

Finally, there’s an implicit assumption in all this that the decline in manufacturing jobs is a natural force, an unstoppable trend that will inevitably lead to the end of the manufacturing sector. And in some versions of the laundry story, the reason we’re losing those manufacturing jobs is that foreigners are stealing them. While we sit idly by naively trying to do the best we can, foreigners are systematically stealing our high-paying manufacturing jobs. In this version of the story, America is being “hollowed out.” Soon it will just be a dry husk supported by service jobs and will collapse.

What’s really going on? Why is manufacturing employment declining as a proportion of total employment? Can a nation’s economy survive on just the service sector? And if America does end up as a pure service economy, will we all be living in poverty?

The manufacturing sector as an employment source is in decline for two reasons. The first is innovation: manufacturers have found ways to get by with fewer workers. The second reason is international trade: some manufacturing jobs are cheaper to do outside the United States than here.

What that means is that the shedding of manufacturing employment is what has kept manufacturing wages above wages in the service sector. If we had stopped either of these trends in the name of keeping the high-paying manufacturing jobs, then they wouldn’t be high-paying anymore.

But how can we stay rich doing each other’s laundry? Isn’t the inevitable result of these trends an America that relies totally on the service sector?

Doing the Mexicans’ Wash

Imagine for a moment an America where everyone knew one thing and one thing only–how to wash clothes down by the river. That would be a poor country indeed. Not only can we not get rich doing each other’s laundry, we’d starve to death without food. If everyone can only do laundry, there is no opportunity for trade, at least domestically. If we were really fabulous at laundry, it’s conceivable that some of us might be able to do it for Canadians and Mexicans and thereby have access to some other goods beyond clean clothes.

Those who worry about foreigners’ stealing all the “good” jobs–the manufacturing jobs–presume that when those jobs disappear, all we’re going to be left with is those low-paying service jobs, and in the ultimate indignity, only the worst service jobs are going to be left.

But of course in the real world, in the America you and I actually live in, our skills go beyond laundry. Our wages don’t depend on the name of the job we hold; they depend on our skills and the demand for those skills. Nothing will stop us from applying our dazzling array of skills domestically to basketball, health care, movies, education and the myriad of other service sectors.

Could we survive on just services? We wouldn’t have to. We could trade those services, just as we do now, for manufactured goods made by foreigners. But wouldn’t we be a lot poorer than we are now? If we were, some of us would find it highly lucrative to go into manufacturing. We’d turn our skills to making things again. If we ever shed all our manufacturing jobs, it will be because the cheapest way to get manufactured goods will be by swapping services for them.

Just as we are phenomenally more wealthy today than we were in 1943, when manufacturing was at its century-high peak as a proportion of total employment, we will be wealthier still if we ever become an all-service economy. That would occur as the natural result of our choices as to where to apply our skills.

So we can’t get rich doing each other’s laundry. But we can get rich choosing service-sector jobs over manufacturing jobs if that is where the highest applications of our skills lie. We’ve been doing it successfully for over 50 years. And it’s likely that the next 50 years will see the manufacturing sector continue to shrink as a source of employment. But barring wars or horrible public policy, we’ll continue to get wealthier.

  • Russell Roberts the host of the weekly podcast, EconTalk and co-creator of the Keynes-Hayek rap videos. His latest book is How Adam Smith Can Change Your Life. He is also a John and Jean De Nault Research Fellow at Stanford University"s Hoover institution.