How Increasing Worker Productivity Has Led to the "Decline of Manufacturing" as a Share of U.S. GDP

As a follow-up to Friday's CD post about U.S. (and world) manufacturing's declining share of GDP, here's some perspective from Chicago Fed economist William Strauss, who explains how rising worker productivity (see chart above) has contributed to that trend:

"In 1950, the manufacturing share of the U.S. economy amounted to 27% of nominal GDP, but by 2007 it had fallen to 12.1%. How did a sector that experienced growth at a faster pace than the overall economy become a smaller part of the overall economy? 

The answer again is productivity growth. The greater efficiency of the manufacturing sector afforded either a slower price increase or an outright decline in the prices of this sector’s goods. As one example, inflation (as measured by the Consumer Price Index) averaged 3.7% between 1980 and 2009, while at the same time the rise in prices for new vehicles averaged 1.7%. So while the number (and quality) of manufactured goods had been rising over time, their relative value compared with the output of other sectors did not keep pace. This allowed manufactured goods to be less costly to consumers and led to the manufacturing sector’s declining share of GDP."