There has been considerable debate about the causes of the "decline" of U.S. manufacturing over the post-war period. We show that the behavior of employment, prices and output in manufacturing relative to services over this period can be explained by a two-sector growth model in which productivity shocks are the only driving forces. The data also suggest that households are unwilling to substitute goods for services (the estimated elasticity of substitution is statistically indistinguishable from zero), so the economy adjusts to differential productivity growth entirely by reallocating labor across sectors.
Trehan, Bharat, and Milton H. Marquis. 2005. “Accounting for the Secular “Decline” of U.S. Manufacturing,” Federal Reserve Bank of San Francisco Working Paper 2005-18. Available at https://doi.org/10.24148/wp2005-18