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.
June 12, 2017 www.pewresearch.org 7
• Note: Based on registered voters. Don’t know responses not shown.
• Source: Pew Research Center Survey, March 17-27, 2016.
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
June 12, 2017 www.pewresearch.org 8
• Note: Based on registered voters. Don’t know responses not shown.
• Source: Pew Research Center Survey, March 17-27, 2016.
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
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
1.3
1.4
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
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
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
Log
Scal
e (2
01
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.
0
5
10
15
20
25
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
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
10
.76
0.8
00
.84
0.8
70
.94
1.0
41
.11
1.3
01
.52
1.7
01
.83
1.9
32
.13
2.4
22
.51
2.7
02
.95
3.0
93
.29
3.5
43
.65
3.8
03
.91
3.9
94
.11
4.1
94
.30
4.4
84
.70
4.8
94
.94
5.1
75
.28
5.4
75
.93
6.5
17
.12
7.9
38
.65
9.5
71
0.1
21
0.6
31
0.9
41
1.4
01
2.0
31
2.7
51
3.1
71
4.0
81
4.7
71
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.