European manufacturing a ‘powerful engine for growth’

The decline of Manufacturing has brought ‘significant Consequences ‘for Competitiveness and employment in the EU, writes Francisco Caballero Sanz.

The commission’s proposal for an industrial renaissance has opened a debate on deindustrialisation and its harmful consequences for the European economy. The contribution of manufacturing to gross value added (GVA) has fallen in the EU from 18.5 per cent to 15.1 per cent since the year 2000.

This relative decline has significant consequences for the competitiveness of the EU. Although manufacturing accounts for slightly more than 15 per cent of GVA, it generates approximately two thirds of the total factor productivity growth in the EU.

Manufacturing also accounts for over two thirds of EU exports and two thirds of the financing of the total private sector investment in research and development in Europe. Manufacturing serves as a powerful engine for growth.

The debate about the decline of manufacturing production has overshadowed another extremely important dimension of deindustrialisation: the impact on employment. The impact of deindustrialisation has been considerably more negative on employment than on production.

The value of EU manufacturing production has actually increased from €1.53 trillion in 2000 to more than €1.7 trillion in 2013 in current prices (or 11.1 per cent in constant prices). However, the evolution of employment in manufacturing in the same period has been clearly negative in absolute terms with over seven million jobs lost.

“The debate about the decline of manufacturing production has overshadowed another extremely important dimension of deindustrialisation: the impact on employment”

These developments are part of a secular trend in advanced economies. For instance, employment in the manufacturing sector in the US has been falling since it peaked in 1978. The impact of deindustrialisation on employment can be measured in terms of the quantity and the quality of jobs available to people.

If the services sector cannot absorb the workers that are leaving the manufacturing sector, structural unemployment grows. The relative quality of service and industry jobs will affect overall wage and employment conditions.

When the development in services is mainly concentrated in those with low productivity growth, the qualitative implications of deindustrialisation on employment might be even more harmful than the quantitative impact.

Manufacturing jobs are more stable and better paid on average than jobs in other sectors of the economy. Monthly earnings for manufacturing workers are five per cent higher than the general average in the EU. Weekly wages in manufacturing are eight per cent higher than in non-manufacturing in the US.

The introduction of structural reforms to foster the development of competitive services sectors can help maintain higher employment levels and job quality. This applies notably to tradable business services. Integrating these high productivity services in global value chains would secure a higher growth potential.

Unfortunately, this is not possible when there are obstacles to the growth of services activities. Structural rigidities due to national regulations in service sectors and the low levels of integration in the internal market hinder the development of these high value added business services.

But services also need industry. Manufacturing has a pull on the rest of the economy. Work conducted at the commission’s joint research centre shows that for every job created in manufacturing up to two additional jobs are created elsewhere in the economy.

This multiplier effect is even higher in innovative high-tech sectors. For every new software designer employed by Twitter, five more jobs are created in the San Francisco area. In addition, generating jobs in advanced high-tech industries enhances the ‘capabilities’ that can make that community stay competitive with a virtuous circle of innovation and investment that can sustain high standards of living in advanced economies.

““The innovative industries of yesterday are shedding jobs today”

These important features are all shared by the key enabling technologies (KETs) that the commission supports strongly. The micro and nanoelectronics industry, and the ICT industry, created more than 700,000 additional jobs during the last decade in Europe. In Germany, about 80 per cent of nanotechnology companies are small or medium sized.

But new jobs need to be filled. The shortage of skilled labour and entrepreneurs capable of handling the highly multidisciplinary nature of KETs remains a challenge: up to 500,000 IT specialists will be needed to fill vacancies in Europe in the near future. In the area of nanotechnology, the gap may reach 400,000 jobs and for photonics, estimates suggest that 80,000 additional qualified specialists will be needed.

But the road to competitiveness has no end. Technologies always become outdated by new technological change. The innovative industries of yesterday are shedding jobs today. This suggests that investing in people is a necessary condition for sustained productivity growth and continued prosperity.

Ensuring the necessary human capital, providing an environment prone to innovation and a market sizable and flexible enough to attract investment and the uptake of the new technologies is the only path to sustained growth in the long run. Putting together all these ingredients in the right way at the right time is a difficult task that will require many efforts on many fronts and the full mobilisation of all stakeholders involved.

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