Britain has a long history of looking to manufacturing as a tool to bring prosperity and ‘good’ jobs. From the late 1940s until the 1980s, nationalisation and even punitive taxes on service...
Britain has a long history of looking to manufacturing as a tool to bring prosperity and ‘good’ jobs. From the late 1940s until the 1980s, nationalisation and even punitive taxes on service sector employment were used to protect manufacturing from competition and keep its employment level high. Determined to reduce regional imbalances, successive governments also used a combination of subsidies and planning controls to prevent growth in thriving places and boost the fortunes of struggling ones.
Despite the dramatic shifts in the nature of the economy since then, policymakers remain attached to the idea that manufacturing can unlock a brighter future. Back in 2011, George Osborne looked forward to ‘a Britain carried aloft by the march of the makers’; the May government developed a manufacturing-led industrial strategy; most of the announced Investment Zones include a focus on advanced manufacturing; and Labour currently argue that their proposed industrial strategy and environmental pledges will rebalance the economy and generate hundreds of thousands of jobs.
ONS data show that, in 2021, the gross value added generated by manufacturing each hour was £45.62: £6 higher than the economy as a whole, £10 higher than construction, and more than £20 higher than accommodation and food services. The manufacturing sector’s productivity trails only that of IT and communications among the largest sectors in the economy. Manufacturing has also seen impressive growth in its productivity, too. Between 1998 and 2023, per-hour productivity in manufacturing grew at around 3.9 per cent per year. As Figure 1 shows, this was a figure well in excess of that of the economy as a whole (which grew at a meagre one per cent per year over the period), and was again second only to IT and communications.
These figures suggest that, so far as productivity is concerned, manufacturing is a great bet for local economies. In contrast to sectors such as transport and storage (which are prominent in struggling areas), attracting new manufacturing firms offers an opportunity to boost productivity in places where high-end services cannot operate easily.
Unfortunately, history tells us that these productivity gains come at the cost of jobs. Deindustrialisation in Britain since the 1960s has mostly been about employment and not output. Today’s industrial sector produces around twice what it did in the 1960s with well under half the number of workers. This is because, without subsidy or protection, firms in high-wage economies can only survive by moving into lower-volume, high-value products or by replacing workers with machines. As Figure 2 shows, these mechanisation processes occur most readily in manufacturing and agriculture, with less productive sectors enjoying steady employment growth.
Recent evidence from the US shows these forces in action. Despite the federal government pouring in hundreds of billions of dollars into manufacturing and associated sectors under the CHIPS and Inflation Reduction Acts, industrial employment has stagnated close to its pre-COVID level at a time when the rest of the economy continues to grow.
Moreover, the jobs actually created by the manufacturing sector tend to be polarised between high-skilled roles at the top of the income distribution and routine ones at the bottom. As Figure 4 shows, even since the 1990s, manufacturing has lost a large number of machine operatives and skilled tradespeople, replacing them with well-educated professionals and people locked in routine ‘elementary’ occupations. This means that while manufacturing firms create valuable high-skilled jobs, they no longer provide the stable ‘middling’ jobs that people without tertiary education desperately need.
Figure 4: Change in the distribution of occupations across manufacturing and other sectors, 1991-2021
Today, Britain is the world’s second-largest exporter of services. As Figure 5 shows, output in exporting services activities, such as insurance or banking and finance, have more than doubled since 1995, while manufacturing output has grown by about 50 per cent. This means that manufacturing accounts for a shrinking slice of the country’s exports and, considering the ubiquity of deindustrialisation across the developed world, is probably set to continue to do so without a concerted (and, if the US data are anything to go by, enormously costly) national effort.
Figure 5: Output in exporting sectors (2015 prices), 1995-2019
Policymakers would, therefore, be wise to resist the urge to focus exclusively on manufacturing, and instead look to grow all their exporting sectors. In many places, and in the big cities in particular, this will mean paying attention to the needs of firms in services, rather than hoping for a return to the industrial economy of the past.
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Glenn Athey
I think the real point is that – if we are to maintain our leading manufacturing sectors in aerospace, automotive, pharma et al – we need investment and development of advanced manufacturing. And it is also linked to increasing the sustainability of the sector – many Industry 4.0 techniques e.g. additive manufacturing – can contribute to more sustainable material use, and more efficient component design and manufacture. I don’t see anyone arguing it will create loads of jobs or turn UK productivity around. Its more about retaining the manufacturing we have. Since it is very tradeable, highly productive and value added – its strategically critical as once you lose it, it won’t come back.