EH240 – Deindustrialisation

‘Evidence for deindustrialisation’:

 Manufacturing % of GDP/GVA:

Evidence for deindustrialisation not happening:

 “employment shares are a treacherous guide to whether the British economy has
experienced de-industrialisation” ~ Bernard Alford (1997)
 Productivity has increased more rapidly in manufacturing than in other sectors of the
economy (including agriculture services).
 Manufacturing output (expressed in real value) has increased:

 Relative increase in manufacturing productivity means manufacturing prices have fallen

faster than service prices.

NOTE: The UK is manufacturing more than ever before, it’s just the value is lower as expressed as
the economy's GDP.
Structural changes in employment:
  Industry’s share of employment has been remarkably stable over the last century.
 Decline in manufacturing employment much smaller than earlier fall in agriculture.
 Services have always employed more people than manufacturing.  The ratio of workers in
services to manufacturing has been +1 in the US, UK, and Japan between 1860 and 1980.
 Service employment has become more important over time.  Some of this increase is also
due to reclassification of work, which was always service, but had been performed within
industrial firms.

Service employment has increased because of:

 Maturity thesis – As people/societies get richer:

o they spend a fraction more on food
o they spend a bit more on goods
o they spend much more on services (the value added by services sector has also
increased over time).

 ‘Computers get cheaper and better over time; haircuts do not’ (Ha-Joon Chang, 2010 in ‘23
Things They Don’t Tell You About Capitalism’):
o For the inflation-adjusted price of a computer 10 years ago, you can now buy three
or four (which are more powerful, smaller, etc.).
o Price of haircuts has risen (wages, inflation).
o Hence, an individual is spending more on haircuts and less on computers a decade
ago.

Summary:

 Percentage of people working in manufacturing has fallen, as has manufacturing’s share of

GDP.
 Manufacturing output has not fallen, it is still rising.
 Productivity gains in manufacturing far higher than other sectors.
 Measurement approach matters.
 Focus on share of GDP masks actual output gains.
 All economies have experienced sectoral shifts.
 Decline in agricultural employment the most significant.
 Services growing faster now but have always employed more people than manufacturing.
 Service sector benefits most from rising incomes.

Conclusion:

 We are living in a post-industrial world in terms of employment, but not production.

Class Notes:
Key Terms:

 Dutch Disease – the apparent causal relationship between the increase in the economic
development of a specific sector and a decline in other sectors.
 TFP – the ratio of aggregate output to aggregate inputs.
 BOP – the difference in total value between payments into and out of a country over a
period.