The decline of manufacturing should not hurt economic growth

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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. However, a study by the IMF finds that the declining share of manufacturing jobs may not have negative implications, provided the right policies are in place.

The IMF notes that 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. A key takeaway from the IMF research is that a shift in employment from manufacturing to services need not hinder economy-wide productivity growth.

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 sizeable labour savings, especially in manufacturing. Thus, the flip side of declining manufacturing employment in advanced economies is that the share of services in employment has increased by about 16 percentage points since the 1970s.

Even so, the negative consequences of disappearing manufacturing jobs can be sizeable for individual workers and their communities, especially in regions that developed as manufacturing hubs. To ensure inclusive gains from structural change, the research suggests that government policies should facilitate the re-skilling of displaced workers and reduce the costs of their re-allocation.

Countries where the share of manufacturing employment has declined may also have been more exposed to other trends such as technological change and the automation of routine tasks. This finding from the IMF report is significant as it could mean that policy should focus on ensuring more inclusive gains from structural transformation rather than on supporting manufacturing employment.

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