Job Destruction without Job Creation: Structural Trasformation in the Overborrowed America

In the US economy most of the structural transformation from manufacturing to services occur in recessions. Typically recessions start with a contraction in manufacturing employment followed by an increase in service employment. This pattern has changed in recent recession in the US. The correlation of manufacturing employment and services employment has increased particularly so in recessions and in US states where households are highly indebted. We argue that this might indicate the existence of an externality from manufacturing employment to services employment. Manufacturing goods are tradable and their demand is determined internationally, services are typically non tradable and their demand is determined locally. So the destruction of jobs in manufacturing leads to fall in the disposable income of households that, in the presence of a financial constraint, force households to contract their demand for services. This leads to job destruction in manufacturing without job creation of jobs in services. We provide several pieces of evidence consistent with this mechanism.