The Decline in Manufacturing Jobs: Not Necessarily a Cause for Concern
IMF Blog, April 9, 2018
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- Authors: Bertrand Gruss, Natalija Novta
- Published: April 9, 2018
Summary findings on structural transformation and productivity
- Manufacturing jobs are waning; in many emerging market and developing economies workers are shifting from agriculture to services, bypassing the manufacturing sector. In advanced economies, the rise in service sector employment typically reflects the outright disappearance of manufacturing jobs.
- Structural transformation is a natural process: as incomes rise, consumption shifts toward services and technological advances yield sizable labor savings, especially in manufacturing.
- Chapter 3 of the April 2018 World Economic Outlook revisits evidence and finds that the declining share of manufacturing jobs need not hurt growth or raise inequality, provided the right policies are in place.
- Using data for a large number of countries over the past five decades, the study documents that some service sectors are very similar to manufacturing in terms of levels, growth rates, and convergence of productivity (output per worker).
- Some market service sectors—such as transport, telecommunications, and financial and business services—have higher levels and growth rates of output per worker than manufacturing.
- Labor productivity in several service sectors tends to converge to the global frontier—growing faster where it is relatively low—allowing countries with low initial productivity levels to catch up toward those with higher levels.
- Since the 2000s, the shift of employment from agriculture to services has benefited aggregate labor productivity in emerging market and developing countries across all regions—and especially in sub-Saharan Africa.
Findings on inequality and distributional effects
- The level of labor income inequality within industry (70 percent of which is accounted by manufacturing) is somewhat lower than within services in a sample of 20 advanced economies.
- Country characteristics matter more than the size of the industrial sector in explaining aggregate inequality. Example: inequality in Denmark is about one-third of that in the United States in both industry and services.
- The biggest factor driving changes in aggregate inequality in advanced economies since the 1980s has been the increase in earning differences in all sectors—rather than the decline of industry jobs.
- Nevertheless, disappearing manufacturing jobs can have sizable negative consequences for individual workers and communities, especially in regions that developed as manufacturing hubs.
Policy implications and recommendations
- Reduce barriers to international trade in services, which are much higher than for goods, so the expansion of highly-productive service sectors is not constrained by the growth of domestic demand.
- Ensure workers’ skills are aligned with those needed in more tradable service subsectors—such as financial and business services—via targeted education and training.
- In emerging market and developing countries where productivity remains low across sectors, adopt a comprehensive approach to unlock productivity growth:
- Strengthen human capital.
- Improve physical infrastructure.
- Improve the business and investment climate.
- Facilitate reskilling of displaced workers and reduce the costs of their reallocation to support inclusive gains from structural change.
- Strengthen safety nets and targeted redistribution policies for workers for whom sectoral reallocation may be very costly or unfeasible (such as those close to retirement age).
Source: Bertrand Gruss and Natalija Novta, “The Decline in Manufacturing Jobs: Not Necessarily a Cause for Concern,” April 9, 2018.
