Accelerated Globalization and The Dynamics of DEINDUSTRIALIZATION Inclusive and Sustainable Industrial Development Working Paper Series WP 27 - 2018

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ACCELERATED GLOBALIZATION AND THE DYNAMICS OF

DEINDUSTRIALIZATION Inclusive and Sustainable Industrial Development
Working Paper Series WP 27 | 2018
Article · November 2018
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Inclusive and Sustainable Industrial Development Working Paper Series
WP 27 | 2018
ACCELERATED GLOBALIZATION AND THE

DYNAMICS OF DEINDUSTRIALIZATION
DEPARTMENT OF POLICY, RESEARCH AND STATISTICS
WORKING PAPER 27/2018
Accelerated globalization and the dynamics of

deindustrialization
Nobuya Haraguchi
UNIDO
Khuong Minh Vu
National University of Singapore
Jürgen Amann
University of Nottingham
UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION

Vienna, 2018
The designations employed, descriptions and classifications of countries, and the presentation of the
material in this report do not imply the expression of any opinion whatsoever on the part of the Secretariat
of the United Nations Industrial Development Organization (UNIDO) concerning the legal status of any
country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or
boundaries, or its economic system or degree of development. The views expressed in this paper do not
necessarily reflect the views of the Secretariat of the UNIDO. The responsibility for opinions expressed
rests solely with the authors, and publication does not constitute an endorsement by UNIDO. Although
great care has been taken to maintain the accuracy of information herein, neither UNIDO nor its member
States assume any responsibility for consequences which may arise from the use of the material. Terms
such as “developed”, “industrialized” and “developing” are intended for statistical convenience and do
not necessarily express a judgment. Any indication of, or reference to, a country, institution or other legal
entity does not constitute an endorsement. Information contained herein may be freely quoted or reprinted
but acknowledgement is requested. This report has been produced without formal United Nations editing.
Table of Contents
1 Introduction ............................................................................................................................... 1
2 Accelerated globalization and deindustrialization: some stylized insights ............................... 2
2.1 Drivers of deindustrialization ............................................................................................ 2
2.2 Evidence of accelerated globalization ............................................................................... 4
3 Methodology ........................................................................................................................... 11
3.1 Estimation specification .................................................................................................. 11
3.2 Data and pretesting .......................................................................................................... 13
3.3 Estimation strategy .......................................................................................................... 13
4 Results ..................................................................................................................................... 15
4.2 Results of the baseline specification, five-year averages ................................................ 17
4.3 Heterogeneities within manufacturing ............................................................................ 19
4.4 Export-related transformation dynamics ......................................................................... 21
4.5 Dynamics in the service industries .................................................................................. 23
4.6 Summary of key findings ................................................................................................ 25
5 Conclusion............................................................................................................................... 26
Appendices ...................................................................................................................................... 28
References ....................................................................................................................................... 31
List of Tables
Table 1 Employment statistics for the manufacturing and service industries for advanced
economies ...................................................................................................................... 9
Table 2 Structural stability test of macro variable .................................................................... 11
Table 3 Employment growth dynamics baseline, annual data .................................................. 16
Table 4 Employment growth dynamics baseline, five-year averages ....................................... 19
Table 5 Employment growth dynamics in manufacturing industries across tech groups, five-
year averages data ........................................................................................................ 20
Table 6 Employment growth dynamics by export pattern, five-year averages ........................ 22
Table 7 Employment growth dynamics in service industries, five-year averages ................... 24
Table 8 The dynamics of employment growth: summary of regression results ....................... 26
Table 9 Data sample ................................................................................................................. 28
Table 10 Summary statistics of data for the manufacturing and service sector by country ....... 29
Table 11 Classification of manufacturing and service industries ............................................... 30
iii
List of Figures
Figure 1 Employment and value added shares between 1970 and 2015 ..................................... 5
Figure 2 Regional Trade Agreements (RTA) between 1970 and 2018 ....................................... 6
Figure 3 Import-export patterns between 1970 and 2015 ............................................................ 7
Figure 4 Evolution of prices: clothing and footwear vs. all goods .............................................. 8
iv
Abstract
In this paper we examine the patterns of structural change for a set of advanced economies
between 1970 and 2015, with a particular emphasis on the most recent periods characterized by a
high and growing degree of global market integration. We contextualize the link between
productivity growth and the structural transformation of manufacturing and service industries, and
explore potential channels of heterogeneity of the observed patterns across different specifications.
Our study finds that deindustrialization patterns in manufacturing underwent significant structural
changes in the mid-1990s and specifically that the positive link between manufacturing
productivity and restructuring accelerated in the post-1995 period, whereas similar patterns were
not observed for the service sector. Moreover, low-technology industries in manufacturing and net-
importing countries, in particular, seem to be most severely affected by the recent wave of Asia-
led globalization.
Key words: Advanced economies, Asia, deindustrialization, employment, Europe, globalization,

industrial policy, industrialized countries, structural change
JEL codes: F60, O40, O57
v
1 Introduction
Over the past decades, deindustrialization in advanced economies has manifested itself as a
continuous decline in manufacturing employment. Bluestone and Harrison (1982, p. 6) describe
the steady fall in the share of manufacturing employment in the total economy as the central
phenomenon behind the systematic disinvestment of a country’s manufacturing industries. It is a
well-established observation in the literature that both the manufacturing sector’s share of
employment and value added in the total economy has contracted considerably over the last
decades (Brady and Denniston, 2006; Tregenna, 2009; among others). At the same time, the global
economy has entered a new phase of development in the last decades and particularly since the
1990s. We argue in this paper that this era can be characterized by an ‘acceleration of
globalization’ through the rapid spread of information and communication technology (ICT) and a
further increase in global economic integration, as demonstrated by the substantial increase in
regional trade agreements (RTAs).
This paper explores how this high and increasing degree of global market integration has had an
effect on structural change dynamics within the manufacturing and service sector in advanced
economies. This question is relevant for a number of reasons: firstly and despite the numerous
advantages of global integration, it goes without saying that fast-paced labour market
transformations pose a challenge for both the government and the labour force in advanced
economies. With manufacturing jobs having rapidly diminished over the last decades and an
increasing degree of job polarization in high-income countries being evident, the recent era of
global market integration has brought its own adverse socio-economic and political implications
with it. Secondly, insights on the timing and effect of accelerated globalization on
deindustrialization at the sector level may introduce new challenges and pathways of economic
transformation. Understanding the extent to which deindustrialization patterns have evolved and
changed over time is relevant not only for the most advanced economies, but also has important
ramifications for developing economies which will very likely face similar challenges in the
foreseeable future.
In this context, this paper provides insights into the dynamics of deindustrialization for a set of
advanced economies during the latest wave of Asia-driven globalization. By conducting a
comprehensive econometric analysis using the most recent industry-level data, this paper presents
an extensive empirical account of structural change and the profound impact this development has
had on the dynamics of global economic integration. It furthermore explores the heterogeneity of
the observed changes within manufacturing as well as across economies. We find that
deindustrialization in the set of advanced economies included in our study experienced significant
1
structural changes as a result of the most recent Asia-led wave of globalization from the early to
the mid-1990s onwards. Specifically, we find that the positive link between manufacturing
productivity and restructuring accelerated in the post-1995 period, whereas similar patterns were
not observed for the services sector. We also note a significantly higher degree of
deindustrialization in low-skilled, labour-intensive industries and non-exporting economies.
This paper is structured as follows: in Section 2, we provide a stylized discussion of the roots and
causes of deindustrialization and provide evidence that supports the hypothesis that the
acceleration of globalization has had a substantial effect on the dynamics of deindustrialization in
advanced economies. We develop our empirical methodology in Section 3 and present the results
in Section 4. We conclude our findings in Section 5.
2 Accelerated globalization and deindustrialization: some stylized insights

2.1 Drivers of deindustrialization
In an attempt to explain the rapid pace of deindustrialization, previous studies have identified three
primary factors: one of these factors is imbalanced productivity growth across industries in a
manufacturing-led economy.1 The rationale behind this is that the most productive manufacturing
industries will be those that produce more output with less labour, i.e. that have the highest labour
productivity. This, in turn, implies a declining employment share in the most dynamic industries.
A second (and related) factor is a change in the demand structure of an economy characterized by a
higher preference for services than for manufactured goods as the country becomes wealthier. The
reasoning behind this argument follows the notion underlying Engel’s law, which states that the
fraction a household spends on agricultural products decreases as the household’s income rises.
This concept has been adopted in the case of manufacturing by Clark (1957) to illustrate the shift
of production priority from agriculture to manufacturing in a country’s pre-development phase,
and from food and beverages to more technology-intensive products, such as electrical goods and
motor vehicles, within manufacturing (UNIDO, 2018). The notion of a change in the demand
structure away from manufacturing and towards services once an economy has reached its post-
industrial stage has also been put forward by Bell (1976) and is complemented by Kongsamut et
al. (2001) who discuss models that combine balanced growth with labour reallocation dynamics.
Even though it is true that the share of income spent on manufacturing goods decreases as income
levels rise, it has often been argued that it is not so much the change or saturation in demand but
1
This view has been expressed in a wide range of empirical as well as theoretical enquiries; see, among others, Clark
(1957), Baumol et al. (1985, 1989), Ramaswamy and Rowthorn (1997), Ramaswamy and Rowthorn (1998) or
Rowthorn and Coutts (2004, 2013).
2
rather that the significant drop in the relative prices of manufacturing goods is responsible for this
trend. This is attributable to the fact that manufacturing typically offers a greater potential for
productivity growth than other sectors (UNIDO, 2018). In other words, it is the inexpensiveness of
manufactured goods in recent times that has led to a relative decline in proportional household
spending on manufactured goods (Rowthorn and Coutts, 2013), despite the fact that individuals are
consuming manufactured goods, such as clothes, IT devices, etc., at an unprecedented rate. As
such, these two factors can be considered internal ‘natural market forces’ associated with the
development of the domestic labour and goods markets as economies grow richer. According to
this view, the contraction of the share of manufacturing employment in the economy caused by
these ‘internal’ factors and their interaction is largely a domestic concern.2
The third (and related) factor driving deindustrialization is associated with the effect of
globalization. However, there is less consensus among scholars about the magnitude of the impact
of North-South trade on deindustrialization. On the one hand, deindustrialization in advanced
countries is argued to be a product of their deteriorated competitiveness in labour-intensive
industries (or, in other words, the comparative advantage of developing countries), particularly as
developing countries embrace globalization more pro-actively to expand their production capacity
through foreign direct investment and the introduction of advanced technologies (Wood, 1995a;
Alderson, 1997, 1999). 3 This effect is enforced by companies in advanced countries, which
embrace globalization by restructuring their global production networks, thereby enhancing
productivity and competitiveness. 4 Along these lines, influential studies such as Krugman and
Lawrence (1993), Ramaswamy and Rowthorn (1997, 1998), and Rowthorn and Coutts (2004)
argue that the effect of globalization on deindustrialization is minor. On the other hand, others5
stress the significant impact North-South trade has on the decline in manufacturing employment,
especially in unskilled labour-intensive industries, and point out the socioeconomic and political
implications of these developments. Even though the benefits of open trade have been confirmed
in both theoretical and empirical studies alike, it goes without saying that fast-paced labour market
2
Another factor often cited in the literature is the outsourcing of activities previously performed inhouse to specialized
service providers such as call centres, catering, transportation, etc. This reclassification is not to be mistaken with an
actual contraction of manufacturing, but is rather the consequence of the current accounting system.
3
McKinnon (2013) demonstrates that saving deficiency, especially chronological fiscal deficits, was a factor that caused
the deindustrialization of the USA.
4
The effect of international trade on firm restructuring has, for example, been theoretically demonstrated by Melitz
(2003) or Disney et al. (2003), who study UK manufacturing from 1980 to 1992 and find that external restructuring,
much of which comes from multi-establishment firms closing poorly-performing plants and opening new, high-
performing ones, plays a major role in driving labour productivity and TFP growth.
5
See, among others, Bluestone and Harrison (1982), Ross and Trachte (1992), Sachs et al. (1994), Wood (1995a,b),
Saeger (1997), Kucera and Milberg (2003) and Autor et al. (2013, 2017).
3
transformation poses a challenge for both governments and the labour force in advanced
economies.
The above discussion reveals that deindustrialization is a mixed indicator. On the one hand, it may
represent a healthy transformation of a country’s economic structure towards higher value-added
activities, adapting to a changing global landscape. On the other hand, it could be a sign of
deterioration in national competitiveness and may potentially induce high social costs.6 As such,
globalization presents both threats and opportunities for advanced economies and may require
careful policy interventions, with the key policy focus being how advanced countries can exploit
opportunities and more effectively deal with challenges in their efforts to restructure and reform.7
As emphasized by Rowthorn and Coutts (2004, 2013) as well as Haraguchi (2015) and Haraguchi
et al. (2017), manufacturing still matters, even for the most advanced economies, and its
development should be monitored diligently to forestall undesirable but avoidable outcomes that
might reach beyond the manufacturing sector.
2.2 Evidence of accelerated globalization

Some initial insights. In this section, we offer some exploratory evidence to support the
hypothesis that globalization has accelerated in recent decades, particularly since the latest wave of
Asia-led globalization in the 1990s. We then proceed to test this hypothesis in more depth.
Over the past decades, deindustrialization in advanced economies has manifested itself as a
continuous decline in manufacturing employment. Bluestone and Harrison (1982, p. 6) define the
unremitting downturn of the share of manufacturing employment in the total economy as the major
phenomenon behind the systematic disinvestment of a country’s manufacturing industries.
6
Tregenna (2014) provides a conceptual framework to determine whether a deindustrialization process is desirable or
not.
7
Jorgenson and Timmer (2011) show that an in-depth analysis of structural change at the sector level is needed to better
understand the process of economic growth and structural change of a national economy.
4
Figure 1 Employment and value added shares between 1970 and 2015
Note: The years 1990 and 1995 are identified by grey, vertically dashed lines.
Source: Authors’ calculations based on KLEMS data; see Appendix A for more information.
As illustrated by Brady and Denniston (2006), the share of manufacturing employment in the 18
most affluent industrialized economies contracted substantially between 1960 and 2001, from an
average rate of approximately 40 per cent in 1960 to about 20-30 per cent in 2001. Moreover,
recent data seems to suggest that this trend appears in line with Tregenna’s (2009) description of
deindustrialization tendencies that are marked by a decline in the manufacturing sector’s share of
employment and value added in the total economy. Figure 1 illustrates this for the set of countries
included in our analysis and provides some first evidence hinting at a change in the evolution of
the respective shares of employment and value added after the early to mid-1990s as illustrated by
the two vertical dashed lines in Figure 1.8
8
The country sample of our analysis is restricted to this set of advanced countries as we require consistent data
coverage for the pre-1990s period at the 2-digit ISIC industry level for our analysis; see Section 3.2 for more
information.
5
Figure 2 Regional Trade Agreements (RTA) between 1970 and 2018
Notes: Number of additional regional trade agreements by year of enforcement. The years 1990 and 1995 are identified
by grey, vertically dashed lines.
Source: Authors’ calculations based on WTO (2018) data.
At the same time, over the last decades and particularly since the 1990s, the global economy
entered a new phase of development which can be characterized by an ‘acceleration of
globalization’ through the rapid spread of information and communication technology (ICT) and a
further increase in global economic integration, exemplarily illustrated by a remarkable increase in
regional trade agreements (RTAs) as shown in Figure 2. The sharp rise in trade agreements at the
beginning of the 1990s is particularly noteworthy. This trend coincides with massive inflows of
foreign direct investment (FDI), much of which came from advanced economies. For example,
from 1990 to 2000, China’s FDI capital stock expanded at an average annual rate of 25 per cent,
while India’s expanded by 25.7 per cent.9
9
See UNCTAD’s Statistical Database. Note that India’s FDI stock was only one-tenth of China’s in 1990.
6
Figure 3 Import-export patterns between 1970 and 2015
Notes: Levels of imports and exports are represented by the dark and light grey dashed lines, respectively. The green line
represents the gap between the level of imports and exports. The years 1990 and 1995 are identified by grey, vertically
dashed lines.
Source: Authors’ calculations based on World Bank (2018) data.
Similarly, Figure 3 illustrates that a steady increase in the level of imports and exports, represented
by the dashed and dotted grey lines, respectively, is found for all countries included in our
analysis. At the same time, we observe a distinctive discrepancy between countries with an export
surplus (namely Austria, Denmark, Germany, Japan and the Netherlands) and ‘net importers’10
such as Canada, Finland, France, the UK and the US, which also seems to have accelerated as of
the mid-1990s. In other words, there seems to be a growing disparity between countries with a
stronger export orientation as opposed to countries with a significant expansion of imports relative
to exports. We will explore these potential heterogeneity patterns and their effect on structural
transformation dynamics within the manufacturing sector as part of our empirical analysis in the
10
The remaining two countries included in the analysis, Italy and Spain, also followed the net importer’s path before the
financial crisis, but have both witnessed a dramatic decrease in imports from 2007/08 onwards. The empirical analysis
for the net-importing sub-sample is conducted with these two countries with little difference in the results. Consequently,
all reported results include both countries.
7
subsequent section while all surveyed countries have very uniformly engaged more proactively in
international trade over time.
Figure 4 Evolution of prices: clothing and footwear vs. all goods
Notes: Price index of personal consumption expenditure for clothes in the US, indexed 2009. Figures rebased to 1992 =
100 for illustrative purposes. The years 1990 and 1995 are identified by grey, vertically dashed lines.
Source: Authors’ calculations based on BEA (2018) data.
The effect of accelerated globalization. An immediate result of the acceleration in global market
integration for advanced economies is an increasing number of imports of low-cost products from
developing countries which, in turn, reduces the relative price of unskilled, labour-intensive goods
on their domestic market. Their unskilled labour-intensive industries consequently become less
profitable than their more skill-intensive industries in relative terms. As a result, unskilled, labour-
intensive industries contract more rapidly than they would have without the outside exposure to
imported low-cost products. We illustrate this effect by considering the development of
expenditure on clothing and footwear, which is used as a proxy for unskilled, labour-intensive
production processes: the inter-temporal dynamics in Figure 4 show an abrupt divergence between
the price index of clothing and footwear as well as its relative price compared to all manufacturing
goods based on the US price index for personal consumption expenditure in the early 1990s. While
in the pre-1995 period, prices for the said product group had been increasing, albeit at a lower rate
8
than all other goods categories combined, the post-1995 era registered an actual decrease in its
respective prices. This seems to suggest that the Stolper-Samuelson mechanism, which has strong
negative effects on unskilled, labour-intensive industries, has had an increasingly influential effect
since the early 1990s onwards:11 trade between low-wage and advanced economies to some extent
imply that unskilled, labour-intensive activities are prolifically reallocated from industrialized
economies to low-wage and high-tech industries.
Table 1 Employment statistics for the manufacturing and service industries for advanced economies
Mean employment growth

Pre-1995 Post-1995 1970-2015
Manufacturing industries
Austria -0.8 -1.3 -1.1
Canada 0.3 -1.0 -0.3
Denmark -0.8 -2.3 -1.7
Finland -1.8 -1.8 -1.8
France -2.0 -2.2 -2.1
Germany -1.9 -1.9 -1.9
Italy 0.1 -1.5 -0.8
Japan -0.2 -2.8 -1.5
Netherlands -1.8 -1.4 -1.6
Spain -0.3 -1.0 -0.7
United Kingdom -1.9 -2.8 -2.4
United States -0.2 -1.5 -1.0
Service industries
Austria 1.0 0.8 0.9
Canada 2.6 1.2 1.9
Denmark 0.0 1.0 0.6
Finland 1.3 0.6 0.8
France 1.2 0.9 1.0
Germany 1.7 0.9 1.3
Italy 3.5 0.7 1.9
Japan 2.0 -0.1 1.0
Netherlands 0.7 2.2 1.6
Spain 2.2 2.1 2.1
United Kingdom 1.6 0.3 0.9
United States 2.4 1.1 1.5
11
Similar tendencies were observed not only for industrialized economies but also for medium-income countries such as
Argentina, Brazil and Mexico (Cruz, 2015). See UNIDO (2018) for a related discussion on the declining trend of the
relative price of manufacturing to the total economy.
9
Even though affected workers in advanced countries might transfer from their lost low-skilled to
the surging high-skilled jobs as a consequence of these dynamics, the number of new jobs created
will potentially be much lower than the number of former jobs lost in low value-added industries.
Parallel to this—and in contrast to the period between 1970 and 1990—the 1990s and 2000s
witnessed the share of manufacturing employment contract sharply in the average growth rate and
the share of total economy as Table 1 clearly illustrates. comparing the mean employment growth
rate between 1970 and 2015, all analysed countries report negative growth figures for
manufacturing as opposed to the service industries. Moreover, for 11 of the 12 observed countries,
the manufacturing employment growth figures in the post-1995 period have been lower or at least
similarly low compared to the full sample. 12
The significance of the inter-temporal dynamics of deindustrialization. We first test the

statistical significance of the previously observed patterns by applying the Clemente et al. (1998)
test to test for stationarity in the presence of structural breaks for the value added and employment
share as well as the employment growth rate. Table 2 summarizes the results, based on which we
identify structural instabilities at a high level of significance for both shares considered for all
variables and countries.13
The same holds true for employment growth, our main variable of interest in the subsequent
econometric analysis, which is also subject to a significant structural break for most of the
countries considered. As regards the identified break points, Table 2 locates an overwhelming
majority of breakpoints around the early to mid-1990s. In the remainder of this paper, we define a
pre- and post-1995 regime for the purpose of empirical application based on the exploratory and
statistical evidence presented so far. However, we want to stress at this point that the overall
results presented below remain unaffected by a change of the pre- and post-regime cut-offs by a
few periods.
12
For example, the average annual growth of manufacturing employment in the US, already negative in the period 1970-
1995, continued to worsen between 1995 and 2015, falling by -1.3 per cent from -.20 per cent in 1970-1995 to -1.5 per
cent in 1995-2015.
13
This test also provides strong evidence of the stationarity of all respective series, which, however, is not presented here
for the sake of brevity. We also test for stationarity of our data by employing a panel unit root test which provides
supporting evidence confirming the stationarity of our data set; see Section 3 for more details.
10
Table 2 Structural stability test of macro variable
Structural stability tests

Employment Value added Employment
share share growth
Austria 1995 *** 1990 ** 1993
Canada 1993 *** 2004 *** 2002 **
Denmark 1995 ** 2000 *** 2000 *
Finland 2000 ** 1990 ** 1995 **
France 1994 *** 1999 ** 1992
Germany 1992 *** 1990 *** 1996 **
Italy 1998 *** 1993 *** 2006 **
Japan 1997 *** 1994 *** 1991 **
Netherlands 1996 *** 1995 ** 1988 **
Spain 1997 ** 1994 *** 2006 **
United Kingdom 1993 *** 1995 *** 1996
United States . 1993 *** 1999 **
∗p
Note: Sig. levels: < 0.10, ∗∗ p< 0.05, ∗∗∗ p
< 0.01.
3 Methodology
3.1 Estimation specification
The baseline model. The investigation into the dynamics of structural change in the
manufacturing sectors of our set of advanced economies is based on the following dynamic
model:14
dlnHi,tn = β0 + β1dlnHi,tn−1 + β2rLPi,t−1 + β3dlnLPi,t−1 + θXi,t + τt + ηi + εi,t (1)
In Equation 1, dlnHi,tn denotes the employment growth of industry i over period (t − n) and t,
tn = (t − (t − n)) for shorter notation, which is regressed on its one-period lag, dlnHi,tn−1, as well as
the lagged values of industry i’s labour productivity relative to the economy’s average rLPi,t−115 and
industry i’s labour productivity dlnLPi,t−1. Furthermore, θ is a vector of the set of controls in X.
These include (i) the lagged level of employment in industry i, lnHi,t−1; (ii) a measure of the
relative share of employment of industry i in total employment to account for industry-size effects;
14
We follow the approach of Hall and Jones (1999), Acemoglu et al. (2007, 2008) as well as Eicher and Schreiber
(2010) in using a dynamic model to focus on the impact of a key predictor on the dependent variable.
15
We calculate rLPi,t = LPi,t/LPS,t, i.e. the ratio of labour productivity of industry i relative to the average labour
1
productivity of all S sectors of the respective economy at time 𝑡, 𝐿𝑃𝑆,𝑡 = ∑𝑆𝑖=1 𝐿𝑃𝑖,𝑡 .
𝑆
11
(iii) the unemployment rate at the national level to account for variations in economic
performance; (iv) a dummy identifying member states of the European Union to account for the
higher degree of market integration amongst them; (v) a crisis dummy for the financial crisis as
well as (vi) national population.16 Lastly, τt, ηi and εi,t represent industry- and time-fixed effects as
well as the idiosyncratic error term, respectively.
Following the specification in Equation 1, β1 captures the persistence of employment growth

patterns at the industry level, which is expected to be positive, especially for annual data; that is,
the employment growth patterns of an industry are persistent during periods of expansion as well
as of contraction. On the other hand, the coefficient β2 helps assess the dynamics of structural
change within the industry. A positive and statistically significant coefficient tends to suggest that
the industry is experiencing healthy structural change dynamics, as employment growth among
industries with higher labour productivity outpaces that of industries with lower relative labour
productivity, controlling for other factors. When linking this to our previous discussion, it implies
that highly productive industries in advanced economies generate new jobs that have been lost in
low-skilled industry (even though they may potentially be smaller in number). Lastly, the
coefficient β3 detects whether employment growth in an industry is influenced by that industry’s
productivity growth in the previous period. As before, we expect this coefficient to be positive,
with employment growth in one period driven by labour productivity growth in the previous
period.
Accounting for time dynamics. Since the main focus of our study is the extent to which
manufacturing sector employment in the set of advanced economies included here has undergone
significant structural change in the post-1995 period, we extend the model specification in
Equation 1 to account for the dynamic instabilities previously observed in the data by estimating
dlnHi,tn = β0 + β1dlnHi,tn−1 + β2rLPi,t−1 + β3dlnLPi,t−1 +

(γ0 + γ1dlnHi,tn−1 + γ2rLPi,t−1 + γ3dlnLPi,t−1) × post95 + (2)
θXi,t + τt + ηi + εi,t
where the dummy post95 is equal to 1 for the years after 1995 and 0 otherwise. This dummy
variable separates the data set into two periods: the pre-1995 period (post95 = 0) and the post-1995
period (post95 = 1). Consequently, the coefficient vector of the interaction terms γ captures the
16
Please note that depending on the model specification, some of the listed covariates are not defined.
12
acceleration effects of the three key variables dlnHi,tn−1, rLPi,t−1 and dlnLPi,t−1 in the post-1995
period, which is our main way of identifying changes in employment growth dynamics.17
3.2 Data and pretesting

Data. The main data set for our analysis is taken from the EU KLEMS (2018) as well as the
WORLD KLEMS (2018) Growth and Productivity Accounts database, which provides industry-
level measures of outputs, inputs and productivity for the set of advanced countries included in our
study, namely Canada, a set of European countries consisting of Austria, Denmark, Finland,
France, Germany, Italy, Netherlands, Spain and the UK, as well as Japan and the US for the period
1970 to 2015.
The country sample is restricted to this set of advanced countries as we require consistent data
coverage for the pre-1990 period at the 2-digit ISIC industry level for our analysis. The main
variables of interest are the growth rate of ‘Total hours worked by persons engaged’ as well as
‘Gross value added per hour worked (volume indices, 2010 = 100)’, which we use to construct
these variables of interest for our empirical model. See Appendix A for more information.
Pre-testing We also perform a battery of panel unit root tests on the respective series, which
confirm the stationarity of our data set: the Im-Pesaran-Shin (Im et al., 2003) and Fisher-type Choi
(2001) tests all reject the null hypothesis of all panels containing unit roots for each of the
variables in question.18 Selective testing of individual sector-country series confirms these findings,
lending support to the stationarity assumption of the data.19
3.3 Estimation strategy

For the empirical analysis, we resort to the Pooled OLS (referred to as OLS in the following), the
Least Squares Dummy Variable (LSDV or FE) as well as the Generalized Method of Moment
(GMM) estimator. Although their estimates are expected to be biased due to endogeneity, the OLS
and LSDV estimators provide a good starting point for analysis. Bond (2002) demonstrates that for
balanced panel data, Pooled OLS and LSDV estimates for the autoregressive coefficient (β1 in
Equation 1) indicate the upper and lower bounds of its unbiased estimate. In particular, Nickell
(1981) shows that the bias for this autoregressive coefficient is downward and that it influences the
17
Note that the variable post95 is dropped if time-fixed effects τt are included in Equation 2. Throughout the remainder
of this paper, we will refer to the two specifications of Equation 2 as 2a (estimations with country-fixed effects only) and
2b (estimations without time-fixed effects τt), respectively.
18
Because the panel data is not strongly balanced as some early or recent years are not available for some countries and
industries, it is not possible to conduct the panel unit root tests as conducted by Harris and Tzavalis (1999) and Levin et
al. (2002), as such tests would require strongly balanced data.
19
For the sake of brevity, the respective test results are omitted in this version of the paper.
13
biases associated with other coefficients. In addition, the bias of β1 diminishes as time dimension T
increases. For example, the simulation results produced by Judson and Owen (1999) reveal that the
LSDV bias is substantial at 50 per cent when T = 5 but reduces to 30 per cent when T = 10, and to
between 3 per cent and 20 per cent when T = 30, which lies well within the data range of our
analysis.
To address endogeneity issues, GMM estimation strategies can be used, as this allows endogenous
variables to be instrumented with their own lags (Roodman, 2006). Two commonly used GMM
estimators are first-difference GMM (DIF-GMM) and system GMM (SYS-GMM). 20 For our
analysis, we choose the SYS-GMM estimator and use lags 2-5 to instrument the endogenous
variables due to its superior performance in the presence of a highly persistent dependent variable
(Blundell and Bond, 1998).21 The greater asymptotic efficiency of the SYS-GMM estimator is also
evident in other studies such as Bond et al. (2001) and Soto (2009). Soto (2009) demonstrates that
SYS-GMM is more valid than DIF-GMM when the number of entities (such as countries) is small.
We estimate Equation 1 as well as Equation 2 for two different durations of the growth episode,
i.e. n = {1,5}. There are several trade-offs involved in this choice. For n = 1, that is, annual growth
rates for which our time dimension is T = 45, we maximize the number of observations which
lessens the severity of their associated biases (Judson and Owen, 1999; Roodman, 2006). This,
however, comes at the expense of potentially ending up with estimates that are fully driven by
business cycle fluctuations and suffer from serious endogeneity. The ‘large’ T results in the over-
fitting problem for endogeneity variables in SYS-GMM regressions weakens the Jansen J test of
instrument exogeneity and tends to produce implausibly high p-values (Roodman, 2009). 22
Consequently, caution should be taken when making inferences based on the SYS-GMM results in
Table 3. On the other hand, our objective with n = 5 is to estimate the correlation between the
current value of the RHS variables by calculating T = 9 non-overlapping five-year averages of our
variables of interest.23 This strategy reduces the number of observations in our sample significantly
and thus increases the bias of the LSDV estimates. It also introduces a level of arbitrariness with
20
The DIF-GMM estimator developed by Holtz-Eakin et al. (1988) and Arellano and Bond (1991) uses first-differences
to remove entity-fixed effects and instruments of these first-differences with the earlier values of explanatory variables.
The SYS-GMM estimator proposed by Arellano and Bover (1995) and Blundell and Bond (1998) augments the DIF-
GMM to obtain a system of two equations: one in differences and one in levels. In the levels equation, the variables are
instrumented with the lagged values of their own first differences.
21
The SYS-GMM estimator, however, requires a mild assumption about the orthogonality between the lagged first
difference in the dependent variable (∆yt−1) and the composite error terms in the levels equation. This assumption allows
∆yt−1 to be used as valid instruments for the levels equation.
22
The p-value of the respective tests in Table 3, i.e. ‘Hansen overid. test’, are all equal to 1.0, which has also been
reported in previous studies; see, for example, Giuliano and Ruiz-Arranz (2009, Table 3, p. 148).
23
We do not consider using five-year overlapping growth episodes which would result in artificially introduced
autocorrelation.
14
regards to the choice of the first and last usable observation; on the upside, however, it also entails
important advantages: firstly, it reduces noise from business-cycle effects; secondly, it mitigates
the problem of high persistence of dependent variables, and thirdly, it helps overcome the over-
fitting problem previously described. Given these points, we put most confidence on the five-year
averages of the SYS-GMM estimations.
4 Results
In what follows we provide a thorough empirical analysis of employment growth dynamics using
annual as well as five-year averaged data sets by employing OLS, LSDV and SYS-GMM
estimators. We also compare the results of our baseline specifications to low- and high-tech groups
within manufacturing as well as to the services industry and analyse the difference in employment
growth dynamics between the set of net exporting and importing countries.
4.1 Results of the baseline specification, annual data

Table 3 presents the main findings for the annual estimates where Estimation (1) corresponds to
(Pooled) OLS and Columns (2) to (4) belong to the FE models of both Equation 1 and Equation 2,
and Columns (5) to (7) present the respective SYS-GMM results. Throughout the remainder of this
paper, we will refer to the two specifications of Equation 2 as 2a (estimations with country-fixed
effects only) and 2b (estimations with both country- and time-fixed effects τt).
The OLS estimation is included to provide an upper bound for the unbiased estimate of the
autoregressive coefficient, while the FE in Column (2) identifies the lower bound for this
coefficient (Bond, 2002). As stated earlier, the FE estimates are expected to be biased due to
endogeneity; however, they can serve as a starting point for a qualitative discussion of the results
and provide insightful benchmarks for the subsequent analysis. As far as the SYS-GMM results in
Columns (5) to (7) are concerned, they are most suited to address endogeneity; however, the issue
of instrument validity outlined above also implies that we should take the empirical findings in
Table 3 with a grain of salt.
15
Table 3 Employment growth dynamics baseline, annual data
(1) (2) (3) (4) (5) (6) (7)

OLS FE1 FE2a FE2b GMM1 GMM2a GMM2b
dlnHtn-1 0.300*** 0.224*** 0.264*** 0.254*** 0.252*** 0.279*** 0.265***
(0.014) (0.038) (0.055) (0.042) (0.034) (0.036) (0.034)
rLPt-1 0.003** 0.006* 0.005 0.005 0.001 0.000 0.000
(0.001) (0.003) (0.003) (0.003) (0.002) (0.002) (0.002)
dlnLPt-1 0.019*** 0.009 0.048** 0.045*** 0.010 0.047*** 0.043***
(0.005) (0.008) (0.021) (0.013) (0.008) (0.013) (0.012)
post95 -0.797* -0.881**
(0.440) (0.357)
post95 × dlnHtn-1 -0.056 -0.038 -0.041 -0.013
(0.062) (0.072) (0.048) (0.053)
post95 × rLPt-1 0.009** 0.008** 0.005* 0.005**
(0.003) (0.003) (0.003) (0.003)
-
post95 × dlnLPt-1 -0.042* -0.047** 0.038*** -0.042***
(0.020) (0.017) (0.014) (0.015)
N 4970 4970 4970 4970 4970 4970 4970

2
adj. R 0.100 0.256 0.066 0.260
AR(2) test for autocorr. 0.300 0.490 0.312
Hansen overid. test 1.000 1.000 1.000
H0: γ = 0 in Equation 2 0.095 0.018 0.001 0.001
Country FE No Yes Yes Yes Yes Yes Yes
Time FE No Yes No Yes Yes No Yes
Covariates Yes Yes Yes Yes Yes Yes Yes
Note: Heterosked. robust standard errors in parentheses. Sig. levels: * p < 0.10, ** p < 0.05, *** p < 0.01. In the above
table, p-values reported for the F-test of H0: γ = 0 in Equation 2.
The Pooled OLS and FE estimates in Table 3 suggest that the autoregressive coefficient β1 in the
baseline specification in Equation 1 lies in the range 0.300 and 0.224, which implies a considerable
and continual growth of annual employment in advanced manufacturing industries. The FE
coefficient of the interaction term post95 × dlnHt−1 in Columns (3) and (4) is negative but not
statistically significant. This implies that the contraction of annual employment was continually
high between 1970 and 1995 but did not slow down insignificantly in the post-1995 period. The
coefficient rLPt−1 in Column (2), which is positive and significant at the 10 per cent level, supports
the hypothesis that the advanced manufacturing industries in our sample experienced significant
16
restructuring where industries with high productivity recorded more employment growth than
those with low productivity. The interaction term post95 × rLPt−1 is found to be positive and
significant in Specifications (3) and (4). Interpreted together, these results suggest that
restructuring towards higher productivity industries can be attributed mainly to the post-1995
period. At the same time, the FE results for the coefficient of the dlnLPt−1 term are significant in
Specifications (3) and (4) while the respective interacted terms for the post-1995 period are
significant and negative, indicating that high productivity growth in the manufacturing sector
explained employment growth in the pre- but not in the post-1995 period, thereby indicating that
past labour productivity did not significantly contribute to employment growth after 1995. Lastly,
the coefficient post95 in Column (3) is negative and significant at the 10 per cent level. This gives
support to the hypothesis that deindustrialization in advanced economies accelerated in the post-
1995 period, which can also be concluded by looking at the F-test of joint significance of the
vector of all post-1995 coefficients, as the null hypothesis of γ = 0 is rejected for all model
specifications presented in Table 3. Moreover, the previously discussed deindustrialization patterns
also hold true for all GMM specifications in Table 3.
To summarize, the investigation based on our annual data set presented above provides the
following major insights. First, annual employment growth in advanced economies experienced
significant structural change in the post-1995 period. The employment growth (shrinkage) in
advanced manufacturing industries did not, however, deteriorate in the post-1995 period. Also, the
restructuring towards employment growth in higher productivity industries was significantly
higher in the post-1995 period in which relative labour productivity—as opposed to absolute
labour productivity—seems to have been one of the main determinants of employment growth.
These results are also found to be robust across estimators.
4.2 Results of the baseline specification, five-year averages

Table 4 presents the results for the five-year averaged data. Starting with the joint summary
statistics, the AR(2) test of the autocorrelation for the SYS-GMM Models in (5) to (7) now lend
realistic support to the assumption of non-autocorrelation and instrument exogeneity, which adds
to the liability of these specifications. As we argued above, the results of the SYS-GMM in (6) and
(7) are the most plausibly reliable ones; more specifically, Model (7) is expected to produce the
most accurate estimates for statistical inference as it accounts for both time- and country-fixed
effects and is thereby capable of most reliably absorbing country-specific as well as structural
components.
17
Similar as for annual data, the coefficient post95 in Columns (3) and (6) is negative and highly
significant at the 1 per cent level. Similarly, the F-test of joint non-significance of all γ parameters
in Equation 2 is highly significant, thereby indicating that the pattern of five-year employment
growth experienced significant structural change in the post-1995 period. The results for relative
labour productivity, which are found to be positive and significant for the post-1995 period
(coefficient post95 × dlnHt−1) suggest that, based on the five-year interval and in line with the
observation for annual data, restructuring towards higher productivity industries was more
pronounced in the post-1995 compared with the pre-1995 period. Lastly, the coefficients on
absolute labour productivity and its time-interacted counterparts are no longer found to be
significant across models.
Given our previous reasoning, we focus on Model (7) which incorporates the most comprehensive
specifications and passes all post-estimation validity tests. The five-year averages indicate that the
post-1995 period can be characterized as having been driven by relative labour productivity
dynamics. The results in Table 4 illustrate that deindustrialization in the advanced economies
included in our study has experienced a strong declining trend and significant structural change.
The result on the continued negative growth of employment patterns show that a manufacturing
industry with a decline in employment in a given five-year period tended to contract in the next
period as well. Also, in the post-1995 period, employment growth in manufacturing industries with
higher labour productivity was positive. In other words, while employment contraction in
manufacturing remained evident from the mid-1990s onwards, it was less severe for industries
with higher productivity in the post-1995 period as opposed to the pre-1995 era. This suggests a
pattern of restructuring in the manufacturing sector in favour of industries with higher skilled
labour in this period.
18
Table 4 Employment growth dynamics baseline, five-year averages
(1) (2) (3) (4) (5) (6) (7)

dlnHtn-1 0.171*** -0.033 -0.294***-0.085 0.171*** -0.108 0.144*
(0.063) (0.080) (0.067) (0.089) (0.065) (0.069) (0.211)
rLPt-1 -0.000 -0.002 -0.001 0.000 -0.001 -0.003 -0.001
(0.003) (0.006) (0.007) (0.006) (0.003) (0.004) (0.010)
dlnLPt-1 0.032 0.016 0.014 0.003 -0.018 0.015 0.002
(0.029) (0.027) (0.031) (0.031) (0.022) (0.029) (0.141)
post95 -3.438*** -2.415***
(0.661) (0.826)
post95 × dlnHtn-1 0.297*** 0.093 0.320*** 0.065
(0.082) (0.088) (0.096) (0.196)
post95 × rLPt-1 0.024*** 0.024*** 0.016* 0.017*
(0.007) (0.007) (0.009) (0.011)
post95 × dlnLPt-1 0.021 0.024 -0.019 -0.004
(0.032) (0.032) (0.031) (0.139)
N 935 935 935 935 935 935 935

2
adj. R 0.066 0.244 0.160 0.259
H0: γ = 0 in Equation 2 0.000 0.008 0.000 0.024
4.3 Heterogeneities within manufacturing

In this section, we assess whether the previously identified employment dynamics can be observed
uniformly or whether low- and/or high-tech industries registered different employment dynamics.
The reasoning behind this lies in the readily reported differences in industry-level dynamics within
the manufacturing sector (Haraguchi, 2015; UNIDO, 2013, among others). We build on these
previous studies by defining groups for all manufacturing industries based on their degree of
technological sophistication (please see Table 11 for the respective industry groupings). Following
19
the previously elaborated rationale, Table 5 presents the three GMM models for low- and high-
tech industries for the five-year averaged data only.
Table 5 Employment growth dynamics in manufacturing industries across tech groups,

five-year averages data
(1) (2) (3) (4) (5) (6)

Low Low Low High
GMM 1 GMM 2a GMM 2b GMM 1 GMMHigh2a GMMHigh2b
dlnHtn-1 0.386*** 0.118 0.316** -0.157 -0.350*** -0.088
(0.134) (0.094) (0.153) (0.098) (0.089) (0.125)
rLPt-1 0.042** 0.037** 0.020* -0.002 0.000 0.012
(0.018) (0.015) (0.011) (0.018) (0.008) (0.008)
dlnLPt-1 0.509*** 0.073 0.018 -0.007 0.062 0.107*
(0.165) (0.111) (0.085) (0.099) (0.049) (0.056)
post95 -7.927*** -3.454*
(2.689) (1.764)
post95 × dlnHtn-1 0.268** 0.114 0.543*** 0.241
(0.124) (0.126) (0.118) (0.176)
post95 × rLPt-1 0.074*** 0.085*** 0.026 0.014
(0.025) (0.027) (0.019) (0.019)
post95× dlnLPt-1 0.534*** 0.597*** 0.006 -0.028
(0.206) (0.211) (0.088) (0.101)
N 255 255 255 425 425 425

AR(2) test for
autocorr. 0.840 0.622 0.335 0.127 0.504 0.301
Hansen overid. test 0.987 0.9910 0.0872 0.339 0.974 0.370
H0: γ = 0 in Equation 2 0.002 0.000 0.000 0.513
Country FE Yes Yes Yes Yes Yes Yes
Time FE Yes No Yes Yes No Yes
Covariates Yes Yes Yes Yes Yes Yes
We again find evidence of a significant acceleration of deindustrialization tendencies in our

sample. As far as low-tech industries are concerned, Column (3) indicates that negative
employment growth of low-tech industries has been very persistent. As regards relative labour
productivity, the coefficients for the pre- as well as the post-1995 period are both found to be
positive and significant. What is more, past labour productivity is also found to have a significant
and positive effect on employment growth in low-tech industries in the post-1995 period. When
20
considering these results together, we find strong evidence that relative as well as absolute labour
productivity are crucial determinants for employment growth in advanced economies’ low-skilled
industries. Furthermore, employment growth can be associated with high productivity of low-tech
industries and, given the highly significant result for the interacted term post95 × rLPt−1, this trend
has only been intensifying since the 1990s. There is a significant trend of employment growth
towards high productivity industries in the low-skilled range with past high labour productivity
being closely correlated with positive employment growth as well.
Evidence is mixed for the set of high-tech industries. The results in Table 5 suggest that high-tech
industries seem to be following the deindustrialization path of low-skilled industries only to some
extent and are not that strongly affected by time dynamics either. This is to be expected as high-
tech industries are typically found to be more productive than their low-tech counterparts.
Moreover, there might be a high degree of labour absorption in high-tech industries which had
been freed up in more low-tech industries as a result of the previously described structural
transformation patterns. What is most noteworthy is the observation that low-tech industries in the
post-1995 period display the most significant and—in terms of magnitude—most considerable
deindustrialization pattern of all aggregates considered up to this point. This provides clear
evidence that low-skilled technology industries have been increasingly shrinking since the 1990s
and are only retaining employment growth in their most productive industries.
4.4 Export-related transformation dynamics

In Table 6, we revisit the observations made in Figure 3, namely that there is a distinctive and
growing difference between exporting and non-exporting economies.
We do so with the objective of identifying heterogeneities in deindustrialization and restructuring

tendencies that may be attributable to the degree of the respective economies’ export orientation.
Our hypothesis is that since actively exporting economies are potentially more efficient and
productive, increasing global market integration may have the most noteworthy effect on non-
exporting economies, as their less efficient industries may be substituted by imports more quickly
and easily. Freed up labour is then most likely to reallocate to more productive industries in the
respective countries. Table 6 confirms this conjecture. The stronger effect on manufacturing
employment for non-exporters holds across multiple model specifications and all relevant
variables. What is more, the reported coefficients for exporters (non-exporters) by and large lie
below (above) the five-year average estimates in Table 4 and add to the credibility of our results.
21
Table 6 Employment growth dynamics by export pattern, five-year averages
(1) (2) (3) (4) (5) (6) (7)

Exporters(a)
dlnHtn-1 0.138 -0.033 -0.274*** -0.114 0.100 -0.110 0.056
(0.100) (0.112) (0.088) (0.115) (0.089) (0.089) (0.056)
rLPt-1 -0.002 -0.003 -0.001 -0.001 -0.003 -0.003 -0.002
(0.004) (0.006) (0.007) (0.007) (0.007) (0.005) (0.002)
dlnLPt-1 0.022 0.007 0.016 0.006 -0.039 0.014 -0.006
(0.029) (0.027) (0.032) (0.033) (0.026) (0.032) (0.027)
post95 -2.529*** -2.053***
(0.784) (0.795)
post95 × dlnHtn-1 0.335*** 0.210* 0.310*** 0.148*
(0.104) (0.108) (0.112) (0.083)
post95 × rLPt-1 0.019** 0.018** 0.015* 0.014*
(0.008) (0.008) (0.008) (0.007)
post95× dlnLPt-1 -0.008 -0.006 -0.043 -0.026
(0.029) (0.029) (0.027) (0.038)
N 583 583 583 583 583 583 583
adj. R2 0.047 0.183 0.123 0.198
H0: γ = 0 in Equation 2 0.002 0.088 0.000 0.031
(b)
Non-exporters
dlnHtn-1 0.076 -0.050 -0.444*** -0.080 -0.039 -0.294*** 0.094
(0.068) (0.063) (0.082) (0.073) (0.114) (0.095) (0.109)
rLPt-1 0.007** 0.006** 0.005 0.007* 0.004 -0.001 -0.006
(0.003) (0.002) (0.004) (0.004) (0.005) (0.004) (0.005)
dlnLPt-1 0.101 0.036 -0.006 -0.001 -0.080 -0.007 -0.077
(0.050) (0.040) (0.071) (0.044) (0.064) (0.074) (0.061)
post95 -5.346*** -4.104***
(0.935) (0.989)
post95 × dlnHtn-
1 0.515*** 0.076 0.546*** 0.148
(0.104) (0.092) (0.135) (0.127)
post95 × rLPt-1 0.035*** 0.034*** 0.026*** 0.034***
(0.008) (0.007) (0.009) (0.011)
post95×dlnLPt-1 0.164 0.145** 0.122 0.253**
(0.108) (0.069) (0.103) (0.101)
22
N 528 528 528 528 528 528 528
adj. R2 0.086 0.390 0.224 0.317
Hansen overid test 0.128 0.704 0.682
H0: γ = 0 in Equation 2 0.000 0.000 0.000 0.011
table, p-values reported for the F-test of H0: γ = 0 in Equation 2. (a) Exporters: Austria, Germany Netherlands, Denmark,
Japan. (b) Non-exporters: remaining countries.
More interestingly and following model specification (7), exporting economies report borderline
significant results for the relative labour productivity and lagged employment growth in the post-
1995 period, indicating that employment trends since 1995 have become more persistent and
affected by restructuring tendencies towards more productive manufacturing industries. The same
observation with regard to restructuring dynamics can be observed for the set of non-exporting
countries in our sample. Here, however, the effect is bigger in terms of magnitude and is also
significant at the 1 per cent level as opposed to the 10 per cent margin determined earlier.
Moreover, employment growth in an industry is found to be also influenced by that industry’s
productivity growth in the previous period. Lastly, the significant impact of accelerating
globalization on employment growth reported earlier is still found to be significant and negative,
as is the joint test of the γ model variables across all specifications.
4.5 Dynamics in the service industries

As the final building block of our analysis, we assess how these previously reported
deindustrialization patterns for manufacturing industries compare to the development of the
service industry to better understand the distinctive pattern previously observed within
manufacturing industries. The empirical results for the service sector analysis are based on the
same models and empirical approach as for the manufacturing sector. For the sake of brevity and
conciseness, Table 7 only reports the results of the five-year averages, where most of the focus will
be on Columns (6) and (7), i.e. the SYS-GMM regressions.
Compared to the manufacturing sector, only very limited evidence of a significant effect of
productivity measures on employment growth is found for the service sector. What is more, no
inter-temporal effects of the post-1995 era seem to be of particular relevance for the service-related
industries of our data sample. This provides strong evidence that the previously observed
23
productivity-related dynamics are a distinct characteristic of the deindustrialization and
restructuring dynamics within the manufacturing industries and not a general driver of sector
dynamics.
Table 7 Employment growth dynamics in service industries, five-year averages
(1) (2) (3) (4) (5) (6) (7)

dlnHtn-1 0.318*** 0.092 0.167 0.217* 0.284** 0.185 0.411***
(0.088) (0.075) (0.141) (0.105) (0.122) (0.198) (0.096)
rLPt-1 0.012*** 0.009* 0.010** 0.009** 0.004 0.003 0.001
(0.003) (0.004) (0.004) (0.004) (0.008) (0.008) (0.005)
dlnLPt-1 0.080 0.031 0.043 0.053 0.016 -0.112 0.024
(0.045) (0.043) (0.055) (0.050) (0.137) (0.219) (0.056)
post95 -3.845** -3.470*
(1.507) (1.934)
post95 × dlnHtn-1 -0.213 -0.267 0.068 -0.144
(0.192) (0.157) (0.252) (0.109)
post95 × rLPt-1 0.037** 0.032** 0.027* 0.012
(0.013) (0.014) (0.016) (0.016)
post95×dlnLPt-1 0.024 -0.007 0.281 0.039
(0.064) (0.051) (0.227) (0.094)
N 852 852 852 852 852 852 852

2
adj. R 0.173 0.100 0.114 0.140
H0 : γ = 0 in Equation 2 0.027 0.008 0.178 0.416
Source: Authors' calculations based on KLEMS data; see Appendix A for more information.
24
4.6 Summary of key findings
To better understand the dynamics of employment growth in the set of advanced economies
included in our study, it is useful to summarize and compare the patterns observed across the
various dimensions analysed in this section. The empirical results summarized in Table 8 build on
the SYS-GMM regression models based on the five-year averages in Table 4 to Table 7, which are
believed to be the most reliable.
Our study shows that employment growth in the manufacturing industries—as opposed to the
service sector—has experienced significant structural change in the post-1995 period and also
shows noteworthy signs of any accelerated structural change dynamics as a result of the most
recent phase of high global market integration. Unlike in the manufacturing sector, employment
growth in the service sector (averaged over a five-year interval) did not decline in the post-1995
relative to the pre-1995 period. There is also ample evidence that the persistence of employment
dynamics in the pre- vs. the post-1995 period is more pronounced for manufacturing than for
services. This indicates that the (contracting) development of employment observed in the earlier
periods of the data sample has further increased as a consequence of the accelerated globalization
tendencies of the last decades. Finally, we also find strong evidence for employment growth in
favour of higher productivity industries in the low-tech industry range. This is to be expected as
labour-intensive, low-tech industries in advanced economies are the ones most affected by
globalization.
As far as the joint (general) analysis of the manufacturing industries in advanced economies is
concerned, the results presented in this paper support the claim that employment expansion in the
manufacturing industries has significantly favoured higher productivity industries after the mid-
1990s. This trend is particularly strong for low-tech industries for which we can observe these
tendencies for the whole sample (with a further significant increase in the post-1995 era) while
similar trends cannot be observed for high-tech industries.
25
Table 8 The dynamics of employment growth: summary of regression results
Manufacturing Services
General Low-tech High-tech Non-exporters Exporters
Prevailing mode of contraction expansion

employment growth
Structural change in yes yes no yes yes no

post-1995 era
Persistence of employment sig. sig. sig. sig. sig. not

dynamics (pre- vs. post-1995) higher higher higher higher higher sig.
Employment growth in favour

of higher productivity industry
1970 – 2015 no yes no no no no

Pre-1995 era no yes no no no no
Post-1995 era yes yes no yes yes no
Source: Authors’ elaboration based on SYS-GMM estimates from Table 4 to Table 7.
5 Conclusion
This paper analyses the deindustrialization tendencies in advanced countries with a particular
emphasis on the inter-temporal component. We examine the patterns of structural change between
1970 and 2015 by investigating the link between productivity growth and structural transformation
within the manufacturing and service sectors across economies. Characterized by the declining
share of manufacturing employment, deindustrialization has been a leading trend in all advanced
economies included in our study over the past five decades. Previous studies have shown that this
trend is driven by three factors: 1) relative growth in service sector demand, 2) higher
manufacturing labour productivity, and 3) globalization. The interaction between the first two
factors precipitates a considerable reallocation of labour away from manufacturing industries
towards services. As regards globalization, we provide a lengthy discussion and ample evidence
for the hypothesis that deindustrialization dynamics in advanced economies have become more
fast-paced since the early to mid-1990s, a period characterized by a strong and ever increasing
participation of Asian economies in the global economy. The effect of this recent wave of
globalization on the manufacturing sectors of advanced countries is two-fold. First, it accelerates
deindustrialization tendencies within the countries, resulting in a faster pace of manufacturing
employment contraction. Secondly, it influences manufacturing restructuring in a way that favours
industries with higher labour productivity.
26
Our empirical analysis reveals that the deindustrialization dynamics of advanced economies
underwent a noteworthy structural change in the mid-1990s and, in particular, indicates that the
positive link between manufacturing productivity and restructuring accelerated post-1995. What is
more, the dynamics of employment growth in favour of industries with higher productivity was
stronger in the post-1990 period. This suggests that the recent wave of globalization has fostered
restructuring in the manufacturing sectors of the advanced economies included in our study. As
our analysis indicates, the most striking structural dynamics can be observed for the set of low-
skilled and labour-intensive industries within manufacturing whereas more capital-intensive and
high-skilled industries seem to be less affected by continuing global market integration.
Lastly, while the employment growth patterns in the manufacturing as well as in the service
sectors of our set of advanced countries has experienced significant structural change, the
previously discussed dynamics are intrinsic to the manufacturing sector as similar patterns are not
observed for the service sector. These differences further underscore the significant difference
between the two sectors and reflect the uneven economic impact of globalization on the different
sectors of an industrialized economy. As a long-term vision of the direction of structural change in
the economy and insights for effective policy responses to the rapidly changing global economic
environment are crucial for a country to succeed in its efforts to generate growth and create jobs,
policymakers in both advanced and in developing countries may benefit from such research to
which this paper offers a modest contribution.
27
Appendices
A Data
The main data source for this paper derives from EU KLEMS (2018), the main variables of interest
being the growth rate of ‘Total hours worked by persons engaged’ as well as ‘Gross value added
per hour worked (volume indices, 2010 = 100)’ which we use to construct the variables of interest
for our empirical model. Further information on data coverage and summary statistics of the
variables is provided in Table 9 and Table 10, respectively. The following extensions to the 2018
instalment of the EU KLEMS (2018) data have been made:
 For the case of Japan, we resort to the 2012 EU KLEMS release of the data which we rebase
accordingly.
 For the US, data on rLP and dlnLP are obtained by combining data of the March 2013 and
2017 release of EU KLEMS (2018).
 Data for Canada was obtained from WORLD KLEMS (2018). Due to conflicting ISIC
revision classification schemes, a reclassification of the Canadian data to ISIC Revision 4
was necessary. More information on the reclassification is provided in Table 10.
Table 9 Data sample
Non-exporter
Country Data source Data coverage Nobs. vs. exporter
Austria EU KLEMS (2018) 1970 - 2015 1,794 Exporter
Canada World KLEMS (2018) 1970 - 2010 1,353 Non-exporter
Denmark EU KLEMS (2018) 1975 - 2015 1,353 Exporter
Finland EU KLEMS (2018) 1980 - 2015 1,330 Non-exporter
France EU KLEMS (2018) 1975 - 2015 1,353 Non-exporter
Germany EU KLEMS (2018) 1970 - 2015 1,794 Exporter
Italy EU KLEMS (2018) 1970 - 2015 1,794 Non-exporter(a)
Japan EU KLEMS (2018) 1973 - 2009 1,406 Exporter
Netherlands EU KLEMS (2018) 1970 - 2015 1,794 Exporter
Spain EU KLEMS (2018) 1970 - 2015 1,794 Non-exporter(a)
United Kingdom EU KLEMS (2018) 1970 - 2015 1,794 Non-exporter
United States EU KLEMS (2013, 2018) 1977 - 2015 1,326 Non-exporter
Total . 1970 - 2015 18,885 .
Note: (a) Italy and Spain also followed the net importer’s path before the financial crisis, but have both witnessed a
dramatic decrease in imports from 2007/08 onwards. The empirical analysis for the net-importing sub-sample is
conducted with these two countries, with little difference in the results. Consequently, all reported results include both
countries.
28
Table 10 Summary statistics of data for the manufacturing and service sector by country
90th
th
Mean SD Median 10 Percentile Percentile
rLP dlnLP dlnH rLP dlnLP dlnH rLP dlnLP dlnH rLP dlnLP dlnH rLP dlnLP dlnH
Austria 78.0 3.5 -1.1 32.2 23.0 4.0 80.5 3.5 -0.7 35.4 -3.6 -6.2 108.2 11.6 3.3
Canada 88.8 2.5 -0.3 20.1 6.0 5.7 90.6 2.7 0.1 60.7 -4.2 -7.6 108.0 9.6 6.1
Denmark 87.2 1.7 -1.7 28.3 23.8 6.1 91.9 2.9 -1.3 45.1 -8.9 -8.8 118.4 12.2 4.9
Finland 89.5 3.1 -1.8 26.0 11.7 5.8 92.1 3.9 -1.3 62.3 -6.1 -9.0 117.4 11.4 4.2
France 85.8 3.2 -2.1 37.8 7.2 3.3 82.7 3.3 -1.7 48.6 -1.9 -6.2 113.7 8.5 1.1
Germany 111.6 2.3 -1.9 101.0 15.0 5.0 92.1 3.0 -1.0 48.4 -3.5 -7.7 147.7 8.7 2.5
Italy 110.8 2.3 -0.8 101.4 9.0 3.5 90.3 2.2 -0.5 61.3 -5.2 -5.0 117.9 10.8 3.0
Japan 108.2 3.2 -1.5 46.9 10.6 4.2 106.6 3.3 -1.2 45.3 -5.7 -6.7 151.5 13.1 3.3
Netherlands 87.1 3.6 -1.6 59.3 8.9 3.6 81.3 3.5 -1.4 35.0 -3.4 -5.7 109.3 11.9 2.2
Spain 102.2 2.5 -0.7 68.3 8.8 5.1 89.6 2.7 -0.1 59.2 -4.2 -7.5 133.0 9.3 5.3
United Kingdom 90.9 2.7 -2.4 33.1 6.5 5.2 90.8 2.9 -2.1 50.1 -4.6 -9.1 121.1 9.7 3.6
29
United States 79.2 3.7 -1.0 31.7 10.0 4.5 86.4 2.6 -0.3 31.1 -4.2 -6.9 111.0 13.0 3.2
Service industries
Austria 116.9 1.7 0.9 43.3 5.5 4.8 108.3 1.4 0.9 72.7 -4.2 -3.7 180.1 8.2 5.2
Canada 103.3 1.3 1.9 24.2 3.6 3.6 101.0 1.2 1.8 75.4 -2.7 -2.0 137.6 5.7 6.2
Denmark 117.8 1.6 0.7 53.7 6.1 4.1 106.1 1.4 0.7 65.3 -5.1 -3.7 178.6 8.3 5.0
Finland 117.6 1.4 0.9 38.8 5.2 4.7 106.9 1.0 1.1 85.4 -3.7 -4.2 166.5 7.6 5.1
France 112.9 1.1 1.1 37.5 5.5 4.9 103.5 0.5 1.2 85.6 -3.2 -2.2 154.1 5.8 4.8
Germany 113.6 1.9 1.0 46.5 4.8 3.2 101.7 1.5 1.0 73.6 -2.7 -2.0 167.7 6.8 4.2
Italy 129.9 0.3 1.7 89.0 5.5 5.0 103.8 0.2 1.4 77.1 -4.8 -2.6 193.8 5.5 6.3
Japan 122.1 1.7 1.3 50.6 6.4 3.9 111.2 1.6 0.9 80.5 -4.8 -2.8 189.7 9.0 5.2
Netherlands 116.5 1.4 1.6 60.4 4.8 5.1 101.0 1.4 1.0 67.3 -3.5 -2.5 182.5 6.1 5.8
Spain 123.6 1.0 2.4 63.6 5.8 5.7 104.4 0.9 1.9 64.9 -5.3 -3.2 214.5 8.1 8.1
United Kingdom 111.8 1.8 1.1 37.0 7.7 5.7 103.7 1.3 1.1 82.1 -4.9 -3.3 159.0 7.8 6.2
United States 108.0 1.3 1.7 34.8 4.3 3.4 103.4 0.7 1.6 67.5 -2.9 -1.9 157.9 6.7 5.1
B Sector classification
Table 11 Classification of manufacturing and service industries
ISIC Code Description Remark

Rev. 4 (Rev. 3)
10-12 (15t16) Food products, beverages and tobacco Low-tech
13-15 (17t19) Textiles, wearing apparel, leather and related products Low-tech
16-18 (20+21t22) Wood and paper products; Low-tech
Medium-
19 (23) Coke and refined petroleum products tech
20-21 (24) Chemicals and chemical products High-tech

Medium-
22-23 (25+26) Rubber and plastic products, and other non-metallic mineral products tech
24-25 (27t28) Basic metals and fabricated metal products, except machinery and equipment Medium-tech
26-27 (30t33) Electrical and optical equipment High-tech
28 (29) Machinery and equipment n.e.c. High-tech
29-30 (34t35) Transport equipment High-tech
31-33 (36t37) Other manufacturing; repair and installation of machinery and equipment High-tech
Service industries
45 (50) Wholesale and retail trade and repair of motor vehicles and motorcycles
46 (51) Wholesale trade, except of motor vehicles and motorcycles
47 (52) Retail trade, except of motor vehicles and motorcycles
49-52 (60t63) Transport and storage
53+61 (64) Postal and courier activities, telecommunications
I (H) Accommodation and food service activities
58-63* Publishing, audio-visual and broadcasting activities, IT and other information services. Professional,
M-N (71t74) scientific, technical, administrative and support service activities
K (J) Financial and insurance activities
L (70) Real estate activities
O (L) Public administration and defence; compulsory social security
P (M) Education
Q (N) Health and social work
R+S (O) Arts, entertainment and recreation; other service activities. Other service activities
T (P) Activities of households as employers; goods- and services-production activities of households for own use
Note: * Partly contained in ISIC Rev.3 industry 22.
Source: Industry re-classification based on authors’ elaboration following EU KLEMS (2018) aggregation and
UNSD (2007).
30
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ACCELERATED GLOBALIZATION AND THE DYNAMICS OF

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Khuong Vu Juergen Amann

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ACCELERATED GLOBALIZATION AND THE

Accelerated globalization and the dynamics of

UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION

Key words: Advanced economies, Asia, deindustrialization, employment, Europe, globalization,

JEL codes: F60, O40, O57

2 Accelerated globalization and deindustrialization: some stylized insights

2.2 Evidence of accelerated globalization

Figure 4 Evolution of prices: clothing and footwear vs. all goods

Mean employment growth

The significance of the inter-temporal dynamics of deindustrialization. We first test the

Structural stability tests

dlnHi,tn = β0 + β1dlnHi,tn−1 + β2rLPi,t−1 + β3dlnLPi,t−1 + θXi,t + τt + ηi + εi,t (1)

Following the specification in Equation 1, β1 captures the persistence of employment growth

dlnHi,tn = β0 + β1dlnHi,tn−1 + β2rLPi,t−1 + β3dlnLPi,t−1 +

3.2 Data and pretesting

3.3 Estimation strategy

4.1 Results of the baseline specification, annual data

(1) (2) (3) (4) (5) (6) (7)

N 4970 4970 4970 4970 4970 4970 4970

4.2 Results of the baseline specification, five-year averages

(1) (2) (3) (4) (5) (6) (7)

N 935 935 935 935 935 935 935

4.3 Heterogeneities within manufacturing

Table 5 Employment growth dynamics in manufacturing industries across tech groups,

(1) (2) (3) (4) (5) (6)

N 255 255 255 425 425 425

We again find evidence of a significant acceleration of deindustrialization tendencies in our

4.4 Export-related transformation dynamics

We do so with the objective of identifying heterogeneities in deindustrialization and restructuring

(1) (2) (3) (4) (5) (6) (7)

4.5 Dynamics in the service industries

Table 7 Employment growth dynamics in service industries, five-year averages

(1) (2) (3) (4) (5) (6) (7)

N 852 852 852 852 852 852 852

Prevailing mode of contraction expansion

Structural change in yes yes no yes yes no

Persistence of employment sig. sig. sig. sig. sig. not

Employment growth in favour

1970 – 2015 no yes no no no no

Source: Authors’ elaboration based on SYS-GMM estimates from Table 4 to Table 7.

Table 9 Data sample

ISIC Code Description Remark

10-12 (15t16) Food products, beverages and tobacco Low-tech

16-18 (20+21t22) Wood and paper products; Low-tech

20-21 (24) Chemicals and chemical products High-tech

26-27 (30t33) Electrical and optical equipment High-tech

28 (29) Machinery and equipment n.e.c. High-tech

29-30 (34t35) Transport equipment High-tech

46 (51) Wholesale trade, except of motor vehicles and motorcycles

47 (52) Retail trade, except of motor vehicles and motorcycles

49-52 (60t63) Transport and storage

53+61 (64) Postal and courier activities, telecommunications

I (H) Accommodation and food service activities

K (J) Financial and insurance activities

L (70) Real estate activities