The Decline in Manufacturing Jobs: Not Necessarily a Cause for Concern

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.

The decline in manufacturing jobs is often met with anxiety. People are concerned that a smaller manufacturing sector implies slower economic growth and a scarcity of well-paying jobs for low- and middle-skilled workers – contributing to worsening inequality.

In Chapter 3 of the April 2018 World Economic Outlook, we revisit the evidence supporting those beliefs and find that the declining share of manufacturing jobs need not hurt growth or raise inequality, provided the right policies are in place.

Shifts in economic activity and productivity

Shifts in economic activity are part of a natural process of “structural transformation.” As people get richer, they consume more services – such as health and financial services. Technological advances also lead to sizable labor savings, especially in manufacturing.

Our study provides novel evidence of how a stronger expansion of service rather than manufacturing jobs in emerging market and developing economies may affect their ability to catch up with advanced economy income levels. Using data for a large number of countries over the past five decades, we document 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. Moreover – just as in manufacturing – labor productivity in several service sectors tends to converge to the global frontier: that is, it grows faster where it is relatively low, allowing countries with low initial productivity levels to catch up toward those with higher levels.

As the highly-productive service sectors – such as communications, finance, and business activities – have been attracting workers faster than other sectors, the shift of employment from agriculture to services since the 2000s has benefited aggregate labor productivity in emerging market and developing countries across all regions – and especially in sub-Saharan Africa.

Of course, these findings should not lead policymakers into complacency. Barriers to international trade in services – which are much higher than for goods – should be reduced so that the expansion of highly-productive service sectors is not constrained by the growth of domestic demand. Policies should also ensure that workers’ skills are aligned with those needed in the more tradable service subsectors – such as financial and business services. And in many emerging market and developing countries where productivity remains anemic in all sectors, a comprehensive approach is needed to unlock productivity growth across the board, including by strengthening human capital and physical infrastructure, as well as improving the business and investment climate.

Shifts in economic activity and income inequality

Another frequently voiced concern is about the disappearance of high-quality manufacturing jobs in many advanced economies that are simply not available in the service sector. As factories close, many middle-skilled workers need to accept low-paying jobs in the service sector, contributing to the “hollowing out” of the income distribution, and a rise in inequality.

Our analysis shows that the level of labor income inequality within industry (70 percent of which is accounted by manufacturing) is indeed somewhat lower than within services in a sample of 20 advanced economies. But country characteristics are more important than the size of the industrial sector for explaining aggregate inequality. For example, inequality in Denmark is about one-third of that in the United States in both industry and services. And 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.

Still, the negative consequences of disappearing manufacturing jobs can be sizable for individual workers and their communities, especially in regions that developed as manufacturing hubs. To ensure inclusive gains from structural change, policies should facilitate the reskilling of displaced workers and reduce the costs of their reallocation. But policymakers should also be mindful that sectoral reallocation may be very costly or even unfeasible for some workers (such as those close to retirement age) and strengthen safety nets and targeted redistribution policies accordingly.

In sum, the decline of manufacturing as a source of employment need not hurt growth or raise inequality. But the key is to get the policies right.

This IMFBlog was written by Bertrand Gruss and Natalija Novta.

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Globalization Helps Spread Knowledge and Technology Across Borders

It took 1,000 years for the invention of paper to spread from China to Europe. Nowadays, in a world that has become more integrated, innovations spread faster and through many channels.

Our research in Chapter 4 of the April 2018 World Economic Outlook takes a closer look at how technology travels between countries. We find that the spread of knowledge and technology across borders has intensified because of globalization. In emerging markets, the transfer of technology has helped to boost innovation and productivity even in the recent period of weak global productivity growth.

Why spreading technology matters

Technological progress is a key driver of improvements in incomes and standards of living. But new knowledge and technologies do not necessarily develop everywhere and at the same time. Therefore, the way technology spreads across countries is central to how global growth is generated and shared across countries.

Indeed, during 1995-2014, the United States, Japan, Germany, France, and the United Kingdom (the G5) produced three-fourths of all patented innovations globally. Other large countries – notably China and Korea – have started to make significant contributions to the global stock of knowledge in recent years, joining the top five leaders in a number of sectors. While this suggests that in the future they too will be important sources of new technology, during the period under study, the G5 constituted the bulk of the technology frontier.

To trace knowledge flows, our study uses the extent to which countries cite patented innovations from the technology leaders as prior knowledge in their own patent applications. The chart below gives a representation of these cross-country knowledge links. Two features stand out. First, while in 1995 the United States, Europe, and Japan were dominating global patent citations, China and Korea (depicted together as “other Asia”) have made increasingly large use of the global knowledge stock as measured by their patent citations. Second, knowledge links have in general intensified over time, both within (red arrows) and across (blue arrows) regions. An alternative measure for the extent to which foreign knowledge is available for domestic use is the intensity of international trade with technology leaders – and our study looks at this as well. 

Globalization boosts technological development

The increasing intensity of global knowledge flows points to important benefits of globalization. While globalization has been much criticized for its possible negative side effects, our study shows that globalization has amplified the spread of technology across borders in two ways. First, globalization allows countries to gain easier access to foreign knowledge. Second, it enhances international competition – including as a result of the rise of emerging market firms – and this strengthens firms’ incentives to innovate and adopt foreign technologies.

The positive impact has been especially large for emerging market economies, which have made increasing use of the available foreign knowledge and technology to boost their innovation capacity and labor productivity growth. For instance, over 2004-14, knowledge flows from the technology leaders may have generated, for an average country-sector, about 0.7 percentage point of labor productivity growth per year. This amounts to about 40 percent of the observed average productivity growth over 2004-14.

We find that one important factor behind the build-up of innovation capacity in emerging market economies has been their growing participation in global supply chains with multinational companies, though not all firms have benefitted as multinationals sometimes reallocate some innovation activity to other parts of the global value chain.

The increased transfer of knowledge and technology to emerging market economies has partly offset the effects of the recent slowdown in innovation at the technology frontier and helped drive income convergence for many emerging economies. In contrast, advanced economies have been more affected by the technology slowdown at the frontier.

Finally, our study finds evidence that technology leaders themselves benefit from each other’s innovation. This suggests that, going forward, with the growing contribution of China and Korea to the expansion of the technology frontier, there may be scope for positive spillovers from these new innovators to the traditional innovators. Knowledge and technology do not flow in one direction only.

Spreading the know-how

Globalization brings a key benefit – it stimulates the spread of knowledge and technology, helping spread growth potential across countries. But interconnectedness per se is not enough. The assimilation of foreign knowledge and the capacity to build on it most often requires scientific and engineering know-how. Investments in education, human capital, and domestic research and development are thus essential to build the capacity to absorb and efficiently use foreign knowledge. It also requires an appropriate degree of protection and respect of intellectual property rights – both domestically and internationally – to preserve the ability of innovators to recover costs while ensuring that the new knowledge supports growth globally.

Policymakers must also make certain that the positive growth benefits from globalization and technological innovation are shared widely across the population, including by ensuring that innovating firms do not exploit the newly acquired technology to gain excessive control of a market to the detriment of consumers.

This IMFBlog was written by Aqib Aslam, Johannes Eugster, Giang Ho, Florence Jaumotte, Carolina Osorio-Buitron, and Roberto Piazza.