can manufacturing still be a driver of inclusive...

Can Manufacturing Still be a Driver of Inclusive Growth?

Robert Z LawrenceAlbert L Williams Professor of Trade and Investment

Harvard Kennedy School

Senior Fellow, MasterCard Center for Inclusive Growth

Non-Resident Senior Fellow The Peterson Institute.

Research Associate, National Bureau of Economic Research.

Presentation at

INCLUSIVE GROWTH: GLOBAL AND EUROPEAN LESSONS FOR SPAIN

MADRID MAY 31ST 2017

Agenda.

• Introduction: Why Manufacturing Employment matters

• Part1: Deindustrialization in Developed Economies.

• Part 2: Premature Deindustrialization in Emerging Economies.

US Manufacturing employment since 2000 down almost 6 million

Devastating Consequences. Manufacturing jobs were important especially for less-educated men in the USA. Deindustrialization said to be key in black urban problemsand very important in providing jobs in many Midwestern cities.

MasterCard Presentation

For Many the explanation is trade. Especially with Mexico and China

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

US merchandise imports, 1978–2008

Industrial

Non-OPEC other

Ratio to GDP (current dollars)

OPEC = Organization of Petroleum Exporting CountriesSource: Bureau of Economic Analysis

Older White Men Are the Most Negative on Free Trade Deals

June 12, 2017 www.pewresearch.org 6

Good thing Bad thing

% %

TOTAL Population 51 39

White men 40 52

18-29 56 35

30-49 41 51

50-64 34 63

65+ 33 55

Free trade agreements between the U.S. and other countries have been a __ for the United States

• Note: Whites include only those who are not Hispanic.

• Source: Pew Research Center Survey, March 17-27, 2016.

Trump Supporters Viewed FTAs as Bad for U.S.


• Note: Based on registered voters. Don’t know responses not shown.


Registered voters who say free trade agreements have been a __ for the United States

43%

53

34

67

40

46

31

38

47%

38

56

27

48

44

58

55

All voters

Rep/Lean Rep

Dem/Lean Dem

Trump

Cruz

Kasich

Clinton

Sanders

Bad thing Good thing

Among Republicans/Lean Rep,

support ...

Among Democrats/Lean Dem,

support ...

Trump Supporters Said They Have Been Harmed by Free Trade


• Note: Based on registered voters. Don’t know responses not shown.


Registered voters who say free trade agreements have __ the financial situation of their family

39%

48

32

60

36

42

29

36

42%

36

48

26

45

42

51

46

All voters

Rep/Lean Rep

Dem/Lean Dem

Trump

Cruz

Kasich

Clinton

Sanders

Definitely/

Probably hurt

Definitely/

Probably helped

Among Republicans/Lean Rep,

support ...

Among Democrats/Lean Dem,

support ...

Yet the Trend in US manufacturing share of employment has not changed.

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

share

Source: Bureau of Labor Statistics

Manufacturing share in establishment employment, 1961–2010

Fitted trendline

Share

Forecast

But others point to technology: especially automation

Rapid productivity growth is reflected in prices

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2006

2007

Measures of relative manufacturing productivity and prices, 1960–2007

ind

ex (

19

95

= 1

)

Productivity relative to GDP

Price of goods relative to GDP (inverse)

Spending on goods relative to services: Prices fall but Quantities rise slowly (Demand is inelastic)

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

19

60

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62

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64

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10

Log

Scal

e (2

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0 =

0)

Prices

Quantities

Values

Declining shares of nominal spending on goods relative to services

US spending on goods relative to services, 1960–2010

Consumption Spending Share on Goods by Quintile (Income elasticity < 1)

Richest

Poorest

Source: Boppart (2014) Econometrica

So the explanation is technology interacting with demand.

Source: Boppart. (2014)

Share of Goods in US Consumption Spending 1950 -2010

Exception proves the Rule! Since 2010.Slower productivity, less employment loss in manufacturing

US not unusual! Decline in manufacturing share of employment is similar across advanced economies

Share of employment in manufacturing, 1973–2010 (percent)

Country 1973 1990 2000 2010 Change

(1) (2) (3) (4) (4) - (1)

United States 24.8 18.0 14.4 10.1 -14.7

Canada 22.0 15.8 15.3 10.3 -11.7

Australia 23.3 14.4 12.0 8.9 -14.4

Japan 27.8 24.3 20.7 16.9 -10.9

France 28.8 21.0 17.6 13.1 -15.7

Germany 36.7 31.6 23.9 21.2 -15.5

Italy 27.9 22.6 23.6 18.8 -9.1

Netherlands 25.3 19.1 14.8 10.6 -14.7

Sweden 27.6 21.0 18.0 12.7 -14.9

Source: Bureau of Labor Statistics.

Consumption Shares in Goods: Falling In all industrial countries

Manufacturing and Services are complements. Cheaper manufactured goods increases demand for services!

Manufacturing employment, actual and without trade deficit: different levels, similar decline after 2000: Because of faster productivity bigger trade deficits have lower job content.

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actu

al a

nd

ad

just

ed m

anu

fact

uri

ng

emp

loym

ent

(mill

ion

s)Manufacturing employment, actual and adjusted for the manufacturing trade deficit, 1990–2010

Employment without trade deficit

Actual manufacturing employment

Edwards and Lawrence (2013)

Note: Even countries with large trade surpluses in manufacturing experience declining shares

Conclusions: part 1

• Trade a small share of overall displacement

• Most deindustrialization in advanced countries due to the interaction of technological change and inelastic demand in response to declining prices and income growth.

• Trade surpluses/deficits change level of share but not the trend.

Closing the trade deficit would mean more manufacturing jobs…

…but it’s like walking up a downward escalator

Manufacturing Employment Share is humped shaped relative to GDP (42 countries)

Why Hump Shaped? The role of agriculture is crucial• Simple explanations for closed economy with constant income and price elasticities. At low levels of income per capita

agriculture has a high share in GDP with manufacturing and services sectors small.

• Force 1: Price and income elasticity of demand for agriculture very low. Productivity and income growth in agriculture increases demand for output and employment in manufactured goods and services.

• Force2: productivity and income growth in manufacturing, reduces employment in manufacturing and increases demand for output and employment in services.

• When agriculture is large, Force 1 dominates and manufacturing (and services employment grow).

• When agriculture small, Force2 dominates.

• In an open economy trade could mitigate these pressures if price demand elasticity is greater than unity!

Growth and Structural Change: 1950-2012Really “Servicization” rather than Industrialization!

0.2

.4.6

.8

Shar

e of

Em

ploy

men

t

0 20000 40000 60000GDP per capita 2015

Manufacturing Service

Agriculture

Qudratic Fit,1950-2012

Employment Share vs. GDP per capita

Countries: 18 in total. `"ARG"' `"BRA"' `"CHL"' `"CHN"' `"DNK"' `"ESP"' `"FRA"' `"GBR"' `"IDN"' `"IND"' `"ITA"' `"JPN"' `"KOR"' `"MEX"' `"NLD"' `"SWE"' `"USA"' `"ZAF"'

Premature Deindustrialization: BRICS Manufacturing Employment Share far Below US and UK at same levels of GDP Per capita

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.5

40

.59

0.6

40

.68

0.7

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.76

0.8

00

.84

0.8

70

.94

1.0

41

.11

1.3

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.52

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.83

1.9

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.13

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.51

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.95

3.0

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.29

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.65

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03

.91

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.11

4.1

94

.30

4.4

84

.70

4.8

94

.94

5.1

75

.28

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75

.93

6.5

17

.12

7.9

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.65

9.5

71

0.1

21

0.6

31

0.9

41

1.4

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2.0

31

2.7

51

3.1

71

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81

4.7

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5.3

91

6.2

51

6.6

91

7.9

41

8.7

9

usa

uk

brazil

india

safrica

china

Log GDP Per Capita

Share

Examples of peak manufacturing shares

Peak Share Per capita Income (2015 pppdollars)

USA 1953 25 percent $17,977

UK 1961 32 percent $ 15,214

South Africa 1981 17 percent $11,776

Brazil 1986 15.4 percent $11,492

China 2010 19.2 percent $9,876

But Premature Deindustrialization: The curve shifts downward over time

2000

1990

1980

197019601950

.05

.1.1

5.2

.25

Sha

re o

f em

ploy

men

t, M

anuf

actu

ring

0 10000 20000 30000 40000 50000GDP percapita in 2015 $

emp=gpd+gdp^2+decade_dummy

Share of Employment, ManufacutirngAt each level of real income the share of manufacturing in employment is lower. It is becoming harder for countries that industrialize later to achieve the employment levels that were achieved earlier.

Explanation: Technological Progress and International Diffusion • Example:

• Belgium in 1950 Income $10,000 -- Small Car Requires 100 hours labor

• China in 2010 Income $10,000 -- Small Car Requires 15 hours.

• Downward Shift in Employment: Higher productivity, Inelastic Demand.

• Leftward Shift: Now More spent on Services.

Relative Productivity of Manufacturing: Shifting Upwards

2009

2000

1990

19801970

19601950

.51

1.5

22.

5

Rel

ativ

e P

rodu

ctiv

ity o

f Man

ufac

turin

g

0 20000 40000 60000 80000GDP percapita in 2015 $

rel_prod=gpd+gdp^2+t

Relative Productivity of Manufacutirng Downward slope actually reflects changing sector shares in GDP in addition to productivity growth.

Relative Price of Manufactured Goods: Shifting Downwards

2010

2000

1990

1980

1970

1960

1950

.51

1.5

22

.53

Rela

tive

Pri

ce M

an

uf/T

ota

l

0 10000 20000 30000 40000GDP percapita in 2015 $

R=gpd+gdp^2+year

Relative Price of Manufacutured Goods to GDP

Trade impacts timing and levels: But the hump remainsAfricans and Latin American’s lower levels, earlier humps.

Asians with manufacturing trade surpluses: higher levels. Later humps:

Conclusions.: Why Premature Deindustrialization?• In many cases, its not trade – though globalization in the sense of

international diffusion of technology perhaps through FDI and perhaps through embodiment in equipment.

• But its relatively rapid technological change in manufacturing diffused internationally combined with inelastic demand. And eventually all countries will deindustrialize.

• Jobs of the Future will increasingly be in services in both developed and developing countries.

can manufacturing still be a driver of inclusive...

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