Can Manufacturing Still be a Driver of

Can Manufacturing Still be a Driver of Inclusive Growth? Robert Z Lawrence Albert 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 31 ST 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 lesseducated men in the USA. Deindustrialization said to be key in black urban problems and very important in providing jobs in many Midwestern cities. MasterCard Presentation

For Many the explanation is trade. Especially with Mexico and China Ratio to GDP (current dollars) 0.07 US merchandise imports, 1978 2008 0.06 0.05 0.04 0.03 0.02 Industrial Non-OPEC other 0.01 0 OPEC = Organization of Petroleum Exporting Countries Source: Bureau of Economic Analysis

Older White Men Are the Most Negative on Free Trade Deals Free trade agreements between the U.S. and other countries have been a for the United States 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 Note: Whites include only those who are not Hispanic. Source: Pew Research Center Survey, March 17-27, 2016. June 12, 2017 www.pewresearch.org 6

Trump Supporters Viewed FTAs as Bad for U.S. Registered voters who say free trade agreements have been a for the United States Bad thing Good thing All voters 43% 47% Rep/Lean Rep Dem/Lean Dem 53 34 38 56 Among Republicans/Lean Rep, support... Trump Cruz Kasich 67 40 46 27 48 44 Among Democrats/Lean Dem, support... Clinton Sanders 31 38 58 55 Note: Based on registered voters. Don t know responses not shown. Source: Pew Research Center Survey, March 17-27, 2016. June 12, 2017 www.pewresearch.org 7

Trump Supporters Said They Have Been Harmed by Free Trade Registered voters who say free trade agreements have the financial situation of their family All voters Definitely/ Probably hurt 39% Definitely/ Probably helped 42% Rep/Lean Rep Dem/Lean Dem 48 32 36 48 Among Republicans/Lean Rep, support... Trump Cruz Kasich 60 36 42 26 45 42 Among Democrats/Lean Dem, support... Clinton Sanders Note: Based on registered voters. Don t know responses not shown. 29 36 51 46 Source: Pew Research Center Survey, March 17-27, 2016. June 12, 2017 www.pewresearch.org 8

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 Yet the Trend in US manufacturing share of employment has not changed. share 0.35 Manufacturing share in establishment employment, 1961 2010 0.3 0.25 0.2 0.15 0.1 0.05 Share Fitted trendline Forecast 0 Source: Bureau of Labor Statistics

But others point to technology: especially automation

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 index (1995 = 1) Rapid productivity growth is reflected in prices 1.4 1.3 1.2 Measures of relative manufacturing productivity and prices, 1960 2007 1.1 1 0.9 0.8 0.7 0.6 0.5 0.4 Productivity relative to GDP Price of goods relative to GDP (inverse)

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Log Scale (2010 = 0) Spending on goods relative to services: Prices fall but Quantities rise slowly (Demand is inelastic) 1.2 US spending on goods relative to services, 1960 2010 1.0 0.8 0.6 Prices Quantities Values 0.4 0.2 0.0-0.2-0.4 Declining shares of nominal spending on goods relative to services

Consumption Spending Share on Goods by Quintile (Income elasticity < 1) Poorest Richest Source: Boppart (2014) Econometrica

So the explanation is technology interacting with demand. Share of Goods in US Consumption Spending 1950-2010 Source: Boppart. (2014)

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!

actual and adjusted manufacturing employment (millions) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Manufacturing employment, actual and without trade deficit: different levels, similar decline after 2000: Because of faster productivity bigger trade deficits have lower job content. 25 Manufacturing employment, actual and adjusted for the manufacturing trade deficit, 1990 2010 20 15 10 5 0 Actual manufacturing employment Employment without trade deficit 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!

0 Share of Employment.2.4.6.8 Growth and Structural Change: 1950-2012 Really Servicization rather than Industrialization! Employment Share vs. GDP per capita Qudratic Fit,1950-2012 0 20000 40000 60000 GDP per capita 2015 Manufacturing Agriculture Service Countries: 18 in total. `"ARG"' `"BRA"' `"CHL"' `"CHN"' `"DNK"' `"ESP"' `"FRA"' `"GBR"' `"IDN"' `"IND"' `"ITA"' `"JPN"' `"KOR"' `"MEX"' `"NLD"' `"SWE"' `"USA"' `"ZAF"'

0.54 0.59 0.64 0.68 0.71 0.76 0.80 0.84 0.87 0.94 1.04 1.11 1.30 1.52 1.70 1.83 1.93 2.13 2.42 2.51 2.70 2.95 3.09 3.29 3.54 3.65 3.80 3.91 3.99 4.11 4.19 4.30 4.48 4.70 4.89 4.94 5.17 5.28 5.47 5.93 6.51 7.12 7.93 8.65 9.57 10.12 10.63 10.94 11.40 12.03 12.75 13.17 14.08 14.77 15.39 16.25 16.69 17.94 18.79 Premature Deindustrialization: BRICS Manufacturing Employment Share far Below US and UK at same levels of GDP Per capita 0.35 Share 0.3 0.25 0.2 0.15 0.1 usa uk brazil india safrica china 0.05 0 Log GDP Per Capita

Examples of peak manufacturing shares dollars) Peak Share Per capita Income (2015 ppp 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

.05 Share of employment, Manufacturing.1.15.2.25 But Premature Deindustrialization: The curve shifts downward over time At 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. Share of Employment, Manufacutirng emp=gpd+gdp^2+decade_dummy 1950 1960 1970 1980 1990 2000 0 10000 20000 30000 40000 50000 GDP percapita in 2015 $

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.

.5 1 1.5 2 2.5 Relative Productivity of Manufacturing: Shifting Upwards Relative Productivity of Manufacutirng rel_prod=gpd+gdp^2+t Downward slope actually reflects changing sector shares in GDP in addition to productivity growth. 2009 2000 1990 1960 1950 1970 1980 0 20000 40000 60000 80000 GDP percapita in 2015 $

.5 Relative Price Manuf/Total 1 1.5 2 2.5 3 Relative Price of Manufactured Goods: Shifting Downwards Relative Price of Manufacutured Goods to GDP R=gpd+gdp^2+year 1990 2000 1950 1960 2010 1970 1980 0 10000 20000 30000 40000 GDP percapita in 2015 $

Trade impacts timing and levels: But the hump remains Africans 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.