Tuesday, April 10, 2018

Can highly productive services activities make up for the decline in manufacturing sector?

Many developing and emerging economies are seeing a shift of workers from agriculture to services, bypassing the manufacturing sector, which has traditionally been a stable jobs creator with significant boost to overall economic activities. The latest WEO April 2018 devotes a chapter on this structural shift and investigates if it is bad at all. In short, the decline of manufacturing jobs may not hurt growth or raise inequality “provided that the right policies are in place”. 

The catch is that some services sector activities are very similar to manufacturing activities in terms of levels, growth rates, and convergence of output per worker (labor productivity). Therefore, the ongoing structural transformation, although unconventional, could be beneficial if these services sector activities are promoted. 

Here are key highlights from the study:

  • Transport, telecommunications, and financial and business services have higher levels and growth rates of output per worker than manufacturing. Furthermore, productivity convergence (and per capita as well) is similar to manufacturing activities, i.e. it grows faster where it is relatively low, allowing countries with low initial productivity levels to catch up toward those with higher levels.
  • Highly productive service sectors such as communications, finance, and business activities have been attracting workers faster than other sectors. The shift of employment from agriculture to services since the 2000s has benefited aggregate labor productivity in emerging market and developing countries across all regions—and especially in sub-Saharan Africa.
  • On policy front, barriers to international trade in services (much higher than in the case of goods trade) need to be reduced so that “highly-productive service sectors is not constrained by the growth of domestic demand”. Skills enhancement is more needed in the case of tradable service subsectors (financial and business services). In addition to improving business and investment climate, strengthening human capital and physical infrastructure could unlock productivity growth across all economic activities. 
  • Changes in overall inequality are mostly explained by rising inequality within sectors, rather than changes in sector size due to reallocation of workers. This is based on a sample of 20 advanced economies. The level of labor income inequality within industry (70 percent of which is accounted by manufacturing) is somewhat lower than within services. The biggest factor driving changes in aggregate inequality in advanced economies since the 1980s has been the increase in earning differences in all sectors—rather than the decline of industry jobs. 

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