April 9, 2018
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.