The share of manufacturing employment has declined continuously for more than two decades in most advanced economies—a phenomenon that is referred to as deindustrialization. For instance, in the group of countries that are classified as “industrial countries” in the IMF’s World Economic Outlook, the share of manufacturing employment declined from about 28 percent in 1970 to about 18 percentin 1994. The main issues of debate regarding deindustrialization are whether the secular decline in the share of manufacturing employment ought to be viewed with concern, and the extent to which this decline is caused by factors that are internal to the advanced economies, as opposed to external factors in the form of expanding economic linkages with the developing countries.
The early contributions in this area by Baumol (1967) and Fuchs (1968), which were later extended more systematically by Rowthorn and Wells (1987) and Baumol, Blackman, and Wolff (1989), argued that deindustrialization in advanced economies is not necessarily an undesirable phenomenon, but is essentially the natural consequence of the industrial dynamism exhibited by these economies. As the bulk of the workforce in advanced economies is employed in either manufacturing or services, the evolution of employment shares depends mainly on output and productivity trends in these two sectors. In most advanced economics, labor productivity has typically grown much faster in manufacturing than it has in services, while output growth has been about the same in each sector1 Thus, given the similarity of output trends in the two sectors, lagging productivity in the service sector results in this sector absorbing a rising share of total employment, while rapid productivity growth in manufacturing leads to a shrinking employment share for this sector.
This emphasis on differential productivity growth as the main cause of deindustrialization contrasts with Colin Clark’s (1957) influential hypothesis that the evolution of employment structure during economic development is explained by a well-defined sequence of changes in the composition of demand. Clark’s hypothesis essentially consisted of an extrapolation of Engel’s law to the case of manufactures. He argued that—just as, in a poor country, the share of income spent on food declines as per capita income rises, while a growing share is spent on other items such as manufactured goods—as the country develops further, demand shifts increasingly toward services and the share of expenditure devoted to manufactures stabilizes and then ultimately falls. As a result, the employment share of manufacturing should also stabilize and eventually fall. Thus, according to Clark, deindustrialization in advanced economies would be a natural consequence of the shift in demand away from manufactures toward services.
More recent studies seeking to explain the declining share of manufacturing employment, such as for instance those by Sachs and Schatz (1994), Wood (1994 and 1995), and Saeger (1996). broadly concur with the importance assigned to “internal” factors in accounting for deindustrialization. They recognize, however, that “external” factors such as the growth of north-south trade may also have played a significant role in accelerating the decline of manufacturing employment. The role of external factors has been most vigorously stressed by Wood. He argues that manufactured imports from the developing countries are highly labor intensive, and displace many times more workers in the advanced economies than their dollar value would suggest. Thus, even a balanced increase in north-south trade will, under these conditions, reduce manufacturing employment in the north because the number of low-skill jobs lost in the import-competing industries will greatly exceed the new jobs created in the skill-intensive export sector.
The main aim of this paper is to assess the relative importance of the forces described by the various hypotheses that have been put forward to explain deindustrialization. The analytical framework used is an extension of the framework provided in Rowthorn and Ramaswamy (1997). The main findings of the current paper are that deindustrialization has been caused primarily by factors that are internal to the advanced economies—i.e.. by the combined effects of the interactions among shifts in the pattern of demand between manufactures and services, the faster growth of productivity in manufacturing as compared to services, and the associated fall in the relative price of manufactures. The regression analysis further indicates that north-south trade has. on average, contributed less than one-fifth to the relative decline of manufacturing employment in the advanced economies. Moreover, the results show that competition from low-wage producers has had little effect on the overall volume of manufacturing output in the advanced economies. The contribution of north-south trade to deindustrialigation is shown to have been mainly through its effect in stimulating labor productivity in the manufacturing sector of the advanced economies—firms in the north appear to have responded to the competition from cheaper imports both by utilizing their labor more efficiently and by shifting production increasingly toward higher valued items.
This appendix describes a simple model that motivates the regression equations used in the text. It also derives certain mathematical relationships between price elasticities and between income elasticities.
Baumol, William J., 1967, “Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis,” American Economic Review, Vol. 57 (June).
Baumol, William J., Sue Anne Batey Blackman, and Edward N. Wolff, 1989, Productivity and American Leadership: The Long View (Cambridge, Massachusetts: MIT Press).
Brown, Richard, and De Anne Julius, 1994, “Is Manufacturing Still Special?” in Finance and the International Economy, Vol. 8, ed. by Richard O’Brien (Oxford: Oxford University Press).
Falvey, Rodney E., and Norman Gemmel, 1996, “Are Services Income-Elastic? Some New Evidence,” Review of Income and Wealth, Vol. 42 (September), pp. 257–69.
Fuchs, Victor R., 1968, The Service Economy (New York: National Bureau of Economic Research, distributed by Columbia University Press).
Rowthorn, Robert, and Ramana Ramaswamy, 1997, “Deindustrialization: Causes and Implications,” Staff Studies for the World Economic Outlook (Washington: International Monetary Fund, December), pp. 61–77.
Sachs, Jeffrey D., and Howard J. Shatz, 1994, “Trade and Jobs in U.S. Manufacturing,” Brookings Papers on Economic Activity: 1, Brookings Institution.
Saeger, S., 1996, “Globalization and Economic Structure in the OECD” (unpublished Ph. D dissertation; Cambridge, Massachusetts: Harvard University).
Summers, Robert, 1985, “Services in the International Economy,” in Managing the Service Economy, ed. by Robert P. Inman (Cambridge: Cambridge University Press), pp. 27–48.
Wood, Adrian, 1994, North-South Trade, Employment, and Inequality: Changing Fortunes in a Skill-Driven World (Oxford: Clarendon Press).
Robert Rowthorn is a Professor of Economics, Cambridge University. Ramana Ramaswamy is a Senior Economist in the IMF’s Asia and Pacific Department. The authors are grateful to Graham Hacche for raising some of the issues that are discussed in the paper.
For instance, between 1960 and 1994 output grew at roughly similar rates in manufacturing and services—annual growth rates of 3.6 and 3.8 percent respectively; in contrast, productivity in manufacturing during this period grew at an annual rate of 3.6 percent, while productivity in services grew at only 1.6 percent.
These countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Italy, Japan, the Netherlands, New Zealand, Norway, Spain, Sweden, the United Kingdom, and the United States.
Data on fixed capital formation, per capita income, output and prices are taken from the OECD National Accounts, supplemented as required by OECD Historical Statistics. Per capita income is converted to 1986 U.S. dollars by means of purchasing power parities in the IMF World Economic Outlook database. Employment series were taken from a variety of OECD sources, including Historical Statistics, Labor Statistics, and the Intra-sectoral Data Base. Trade statistics are drawn from the UNCTAD database, and our use of the term “developing country” accords with current United Nations practice. Thus, Singapore and Hong Kong SAR are classified as developing countries even though their per capita incomes are now among the world’s highest and despite the fact that they have been classified as advanced economies in the World Economic Outlook since May 1997. The term “manufactures” covers SITC sections 5 to 8 excluding division 68 (nonferrous metals).
The appendix contains a simple model that motivates these equations.
The conventional method is to normalize trade by dividing imports and exports by GDP converted to U. S. dollars at current exchange rates. This method is subject to major distortions caused by large exchange rate fluctuations, which may give the impression that large volume changes have occurred in imports and exports when this is not the case. The use of purchasing power parity (PPP) exchange rates helps to avoid this problem.
We experimented using country-specific autocorrelation coefficients, but these gave much the same results as in equation (9A R). We also experimented with lagged endogenous variables in the regression analysis, but the coefficients turned out to be very small and statistically insignificant. The t-values shown in Table 3 as well as the other tables are based on the conventional OLS estimates of significance, and are very similar to those obtained using White’s correction for heteroscedasticity.
The coefficient of the regression equation indicates, strictly speaking, how the real expenditure share on manufacturing is affected by changes in relative prices. The appendix demonstrates that this coefficient is approximately equal to the elasticity of substitution between manufactures and nonmanufactures.
See Rowthorn and Ramaswamy (1997) for a more detailed discussion of the East Asian experience regarding deindustrialization.
Note that these effects are expressed as a percentage of manufacturing employment (not of total employment). They are derived as follows. An increase of 1 percentage point in the ratio of northern manufactured exports to GDP implies a change of + 1 unit in the variable TRADEBAL. According to equation. (9), this will cause log EMPSHARE to change by +0.012, which is equivalent to a 1.2 percent increase in the number of manufacturing jobs. Conversely, suppose that the ratio of manufacturing imports from the south to GDP increases by 1 percentage point. This will cause the variables TRADEBAL and LDCIMP to alter by -1 and +1 unit, respectively. From equation (9), it follows that log EMPSHARE will change by (+0.012)*(-l) + (-0.041)*(+l) = -0.053, which implies a 5.3 percent fall in the number of manufacturing jobs. Note that, in the average OECD country, 5 percent of manufacturing jobs represent about 1 percent of total employment.