Executive summary
An econometric analysis is used to quantify the factors responsible for the decline in the employment share of manufacturing in advanced economies. The outsourcing of labour-intensive production to low-wage countries also played an important role and was responsible for between a sixth and a quarter of the decline in the share of manufacturing. The resulting fall in demand for goods produced in Britain contributed to the decline in manufacturing employment, but was not the main factor.
This transformation in our external trade is often taken as a sign of intrinsic weakness in the manufacturing sector. There are sectors of the UK manufacturing sector that remain competitive in international trade in the sense that they have a positive or improving trade balance.
Deindustrialisation
A broader definition of the manufacturing sector would include all service inputs that are embodied in the final product of this sector. The percentage is higher than the average in the US (55% in 2011) and although the percentage is much lower in China (20%) it is growing rapidly. However, it seems implausible that such changes account for more than a modest fraction of the large decline recorded in the share of manufacturing employment in advanced economies over the past thirty years.
It can increase productivity in the manufacturing sector by boosting competition and encouraging domestic firms to produce more efficiently. This exchange will eliminate jobs in the garment industries of the advanced economies, but create new jobs in their economies. Official statistics show that before the recent crisis, real production of industrial goods in the average advanced economy grew at about the same pace as the economy as a whole (Table 1).
Statistics also show that in most countries the growth rate of labor productivity in the manufacturing sector has been faster than that of services and the economy as a whole.
Quantification
LDCIMP is designed to capture the additional effects of competition from low-wage countries on manufacturing employment in advanced economies. These effects include increased efficiency in activities that compete directly with low-wage producers, along with shifts in the composition of manufacturing toward higher value-added, skill-intensive, or capital-intensive activities. The variable OPEN is included to see if greater openness to foreign trade leads to higher relative labor productivity in manufacturing and thus less employment in the manufacturing sector.
The reason for using this variable is that capital investment is production intensive, so an increase in the investment rate should skew demand towards manufactured goods. Provided that the goods in question are produced at home, this will stimulate employment in the domestic manufacturing sector. All regressions are based on a sample consisting of the following countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Korea, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Taiwan, the United Kingdom and the United States.
EMPSHARE = share of manufacturing in civilian employment Y = GDP per capita in PPP in constant 1995 international dollars MANTRADEBAL = manufactured exports – manufactured imports. LDCIMP = manufactured imports from developing countries (UN definition - excludes Korea, Malaysia, Singapore and Taiwan; includes China) FIXCAP = gross domestic fixed capital formation. There is strong evidence of a patterned relationship between manufacturing employment and per capita income.
The industry's employment share rises in the early stages of economic development and falls at high per capita income levels. The LDCIMP coefficient is negative and significant, supporting the view that imports from low-wage economies have a negative impact on manufacturing employment in industrial countries, even when accompanied by an equivalent dollar value of industrial product exports in the opposite direction. Calculations based on the British input-output tables for 2008 give a value for this coefficient between 0.4 and 0.5.
Accounting for deindustrialisation
North – South Trade
The USA and the UK compared
In both the UK and the US, a widely praised economic performance was accompanied by a massive decline in the share of manufacturing employment. Both countries experienced a prolonged decline in their manufacturing trade balance, and in both the balance is now in deficit. Although both countries now have a large deficit in their manufacturing trade, the significance of this deficit is different.
The US deficit is mainly financed by borrowing abroad, whereas a large part of the UK deficit is largely covered by income from overseas investment and by the rapidly growing earnings from knowledge-based services. Although the UK has a much weaker manufacturing sector than the US, its overall external position is stronger.
Production
The US still has the strongest manufacturing sector in the world, rivaled only by China in terms of volume, while. As the chart shows, per capita industrial output was similar forty years ago in Britain and America. Productivity was much higher in America, but this was offset by the fact that a much larger proportion of the British population was employed in the manufacturing sector.
Since then, manufacturing employment has fallen dramatically in the UK and the productivity gap between the two countries has widened. As a result, the US now produces roughly 70 percent more manufactured goods per head of population than Great Britain. Per capita output of services is lower than in the US, but the gap has been closing steadily.
This strong performance reflects the contribution of new services exports, which helped boost the overall growth rate of the UK services sector. The contrast between production in the two countries can be illustrated by comparing what happened to production and employment. Between 1973 and 2007, before the financial crisis, US manufacturing output grew by 3.0% annually and.
Over the same period, manufacturing output in the UK rose by 16% and employment fell by a remarkable 58%. While productivity growth in US manufacturing served mainly to increase output, in the UK it served mainly to reduce employment. This is the long-term picture, although the situation has become more muddled since the financial crisis, with output falling sharply in both countries and the US experiencing widespread job losses (Table 4).
International trade
Further information on manufacturing trade is given in Chart 10 which compares the UK and the US with other developed economies. The Eurozone as a whole has a manufacturing trade surplus that has been relatively stable as a percentage of GDP over the past fifty years. Germany and other northern countries enjoy large and sometimes growing surpluses in their manufacturing trade, while France and the Mediterranean countries mostly have deficits in this item.
Any loss of net income in manufacturing trade can in principle be compensated by additional net income from these other items. New sources of overseas income were developed and a previously large deficit in items such as energy, food and raw materials (6-10% of GDP in the mid-1970s) was reduced to a relatively small fraction of GDP (2.6% in 2011). In contrast, the US has not yet developed new sources of revenue to offset its worsening trade balance in manufacturers.
Focus on the UK
To the extent that this is true, the long-term deterioration in the trade balance in the industrial sector may not reflect an intrinsic lack of competitiveness, but may be an endogenous consequence of events elsewhere in the balance of payments. Too much manufacturing capacity may have been lost, and the failure to develop a more dynamic manufacturing sector could ultimately prove to have serious consequences for the industry's balance sheet.
The balance of payments
On the one hand, net transfer payments to international institutions and others are increasing as a share of GDP, mainly due to increased government payments to the EU together with migrant remittances. On the other hand, revenues from knowledge-based services such as finance, insurance, consulting and other business services are increasing sharply. In twenty years, such net earnings in money have increased by more than ten times.
In 1991, knowledge-based services, including finance and insurance, together generated a net income for Britain equivalent to 1.3% of GDP.
Strong and weak industries in UK manufacturing
In most manufacturing industries, imports and exports are growing simultaneously, both absolutely and relative to national output. In the strongest sectors, such as chemicals and pharmaceuticals or other transport, exports exceed imports and the balance is stable or improving. In some cases, total exports are increasing, but they are being outpaced by increasing imports.
The picture is similar but less dramatic for wood, paper and printing, vehicle parts and the rest of the “other” group. The fact that exports are increasing in such supposedly weak industries suggests that they still maintain some areas of strength. This is confirmed by the fact that in most of the weaker industries just listed, domestic production increased.
This should make us cautious about writing off such industries simply because their trade balance is negative and worsening. This is evidence of long-term decline, although even in these industries there should be areas of actual or potential strength and they should not be written off prematurely.
The future
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Ramaswamy (1999), “Growth, Trade and Deindustrialization”, IMF Staff Papers, Vol. 1977), "UK Industry and the World Economy: A Case of De-Industrialization", Cambridge Journal of Economics, Vol. UNCTAD (2003), Trade and Development Report 2003, United Nations Conference on Trade and Development, Geneva. 1994), North-South Trade, Employment and Inequality: Changing Fortunes in a Skills-Driven World, Oxford, Clarendon Press.
