Employment in manufacturing and monetary policy: Cyclical and structural factors

The U.S. recovery from the 2007 – 2009 recession featured real GDP returning to its pre-recession level well before employment overall reached its pre-recession level. Though manufacturing employment has rebounded off its trough, it has not yet returned to its pre-recession level (as of Q2 2015.) This paper estimates the effect of both cyclical and structural drivers of changes in employment in the manufacturing sector. In particular, manufacturing labor demand specifications explored include variables that represent value added, unit labor cost, the price of equipment, and several measures of the cost of capital as well as the primary indicator of Federal Reserve Bank monetary policy – the federal funds market interest rate. Net jobs added on a quarterly basis (from the Business Dynamics Survey of the U.S. Bureau of Labor Statistics -BLS) serves as the dependent variable. Net jobs added has been available only since 1992; however, it captures approximately 98 percent of employment on private, non-farm payrolls – a much more comprehensive representation than the labor market measures provided by the monthly Current Employment Statistics Survey (BLS). Regression analysis of a specification of the above noted cyclical and structural variables on net changes in manufacturing employment accounts for almost half of its variation and is boosted significantly by the inclusion of unit labor costs; in contrast, the federal funds market interest rate does not add significantly to explanatory power. These results suggest that sustained, expansionary monetary policy may not be the best macroeconomic stabilization policy to emphasize if a primary purpose is to stimulate employment growth, especially in the manufacturing sector.