The Economist on jobs and globalization

By Tim Worstall | 4 October 2005

From a leader in the Economist this week:

[C]alculations by The Economist suggest that manufacturing now accounts for less than 10% of total jobs in America. Other rich countries are moving in that direction, too, with Britain close behind America, followed by France and Japan, with Germany and Italy lagging behind.

Shrinking employment in any sector sounds like bad news. It isn't. Manufacturing jobs disappear because economies are healthy, not sick.

The decline of manufacturing in rich countries is a more complex story than the piles of Chinese-made goods in shops suggest. Manufacturing output continues to expand in most developed countries - in America, by almost 4% a year on average since 1991. Despite the rise in Chinese exports, America is still the world's biggest manufacturer, producing about twice as much, measured by value, as China.

The continued growth in manufacturing output shows that the fall in jobs has not been caused by mass substitution of Chinese goods for locally made ones.

This isn't, I think you will agree, what we normally hear. Yes, jobs in manufacturing are going, but the domestic production of manufactures continues to rise as the business becomes more capital intensive and uses less labour.

A new concern is that it is no longer just dirty blue-collar jobs that are being sucked offshore. Poor countries now have easier access to first-world technology. Combined with low wages, it is argued, they can make everything - including high-tech goods - more cheaply. But that's only partly true. China's comparative advantage is in labour-intensive industries; and a basic principle of economics, proven time and again, is that even if a country can make everything more cheaply, it will still gain from specialising in goods in which it has a comparative advantage. Developed economies' comparative advantage is in knowledge-intensive activities, because they have so much skilled labour.

It always helps me to think of comparative advantage not in the way that it is normally explained, that we (or anyone else) should do what we are best at, but that we should do what we are least bad at. In that way I avoid the common trap of thinking that we have to be "the best" at something in order to gain from trade, for this is untrue. If we all do what we are least bad at and swap the results (more formally, specialize and trade) then we are all made better off.

And as The Economist concludes, this shrinkage of the manufacturing workforce is not unprecedented. We seem to be seeing the playing out of what happened in agriculture, from the most important and highest employment industry in every land to, in terms of employment, a small rump of the workforce, yet the value and volume of production has continued to rise, freeing the vast majority of people to go and do something more productive (more interesting perhaps?) than what Karl Marx called the idiocy of rural life.

People always resist change, yet sustained growth relies on a continuous shift in resources to more efficient use. In 1820, for example, 70% of American workers were in agriculture; today 2% are. If all those workers had remained tilling the land, America would now be a lot poorer.