The apparent decline of the manufacturing sector has led some to think it needs a boost - but economic prosperity is more likely to come from other sectors.
As with most things, policies go in and out of fashion and the idea of a ‘manufacturing renaissance’ is definitely in vogue as a route to a more prosperous Britain. While these calls to action are well-intended, irrespective of which side of the political divide they come from, they are unfortunately misinformed.
In fact, manufacturing output has been fairly stable over the last four decades and the UK remains in the top 10 for manufacturing countries globally, despite the dramatic rise of China and India. This misconception is, however, understandable.
During this period, productivity within manufacturing rose impressively as firms adapted to competition, spurred on by technological change and globalisation. Today the production process is much leaner and requiring fewer workers to produce the same output. This explains why the sector is doesn’t provide the huge numbers of jobs in the way that it used to.
Over the same period, the services sector as a share of the UK economy has grown considerably. In relative terms, manufacturing has shrunk – accounting for 10 per cent of GDP, compared to 31 per cent in 1970. But in absolute terms, it remains roughly the same size today as it was nearly 50 years ago.
Modern manufacturing is more mechanised than it was a few decades ago and factories employ fewer workers. Ambitions to grow the sector – either through concerted investment or re-shoring – are unlikely to result in a dramatic increase in jobs. And it’s likely that a significant majority of any jobs created will be low skilled and low paid.
Given we have record levels of employment and very low levels of unemployment, what Britain needs to be more prosperous – to deliver higher incomes and higher standards of living for its people – is not more low skilled jobs, but increased productivity growth.
Businesses fall into one of two categories – local services (those that cater to the needs of their immediate market) and exporters (those that provide goods and services that are traded beyond their local market). Understanding this distinction is crucial to getting to grips with the UK’s productivity problem – local services businesses have low productivity and limited scope for growth. Exporters on the other hand, with their larger markets and greater competition, tend to have higher productivity and a higher potential to increase it further.
The traditional view of UK’s exporters as being overwhelmingly made up of manufacturing firms is no longer accurate. Services now form a significant chunk of exporting firms in the UK, 46 per cent to be precise. More importantly, this is where the UK has a comparative advantage, especially in financial, business, creative and information services. Over the last few decades, these industries have experienced large growth in both productivity and employment and this is set to continue.
This is not to overlook the fact that manufacturing remains an important and highly productive part of the economy. Advanced manufacturing, especially aerospace and pharmaceuticals, is a real strength for the UK and is likely to continue to be so. But it is nonetheless a small part of the economy and funneling resources and political capital into the sector is unlikely to change that, or create many more jobs across the country.
Furthermore, the obsession with manufacturing among many British politicians is preventing them from dealing with more pressing issues which affect a much greater number of workers across the country. For example, how will the many people who work in services fare in unpredictable circumstances outside the EU? What needs to be done to prepare current and future workers for automation and the changing world of work?
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