The Contribution of Manufacturing to Long-Term Economic Growth

Contrary to a widespread perception of industrial decline, the ratio of manufacturing output to GDP has remained relatively stable during the postwar period. The decline in manufacturing employment from its 1979 peak has been accompanied by an acceleration in productivity, with the result that value-added in manufacturing has maintained its historic share of aggregate output. Estimation of production functions including the R&D stock as a measure of technology suggest that the largest increases in multifactor productivity in manufacturing are primarily attributable to technological advance. There is also some evidence of increasing returns to scale. The most promising source of scale effects has to do with the increased penetration of foreign markets by American manufactured exports. Scale effects from international trade and technological advance from industrial R&D play a major role in determining the economy's long-term rate.