Manufacturing Jobs and Inequality : Why is the U.S. Experience Different?

We examine the extent to which declining manufacturing employment may havecontributed to increasing inequality in advanced economies. This contribution is typicallysmall, except in the United States. We explore two possible explanations: the high initialmanufacturing wage premium and the high level of income inequality. The manufacturingwage premium declined between the 1980s and the 2000s in the United States, but it doesnot explain the contemporaneous rise in inequality. Instead, high income inequality playeda large role. This is because manufacturing job loss typically implies a move to the servicesector, for which the worker is not skilled at first and accepts a low-skill wage. Onaverage, the associated wage cut increases with the overall level of income inequality inthe country, conditional on moving down in the wage distribution. Based on a stylizedscenario, we calculate that the movement of workers to low-skill service sector jobs canaccount for about a quarter of the increase in inequality between the 1980s and the 2000sin the United States. Had the U.S. income distribution been more equal, only about onetenth of the actual increase in inequality could have been attributed to the loss ofmanufacturing jobs, according to our simulations