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Abstract
The declining share of manufacturing jobs in overall employment has been a concern for policymakers and the broader public alike in both advanced economies and some developing economies. This concern stems from the widely held belief that manufacturing plays a unique role as a catalyst for productivity growth and income convergence and a source of well-paid jobs for less-skilled workers. Against that backdrop, this chapter aims to provide new evidence on the role of manufacturing in the dynamics of output per worker and in the level and distribution of labor earnings. The two main takeaways from the analysis are that (1) a shift in employment from manufacturing to services need not hinder economy-wide productivity growth and the prospects for developing economies to gain ground toward advanced economy income levels, and (2) while the displacement of workers from manufacturing to services in advanced economies has coincided with a rise in labor income inequality, this increase was mainly driven by larger disparities in earnings across all sectors. These findings imply that the goal of supporting equitable growth would be better served by policy efforts to raise productivity across all sectors and make the gains from higher productivity more inclusive. Facilitating the reallocation of labor to productively dynamic sectors, including by removing barriers to entry and trade in the service sector and supporting the reskilling of workers affected by structural change, is crucial to raise productivity and combat inequality.
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