Two Remarks on Industrial Policy and on Employment

Industry is generally seen as a source of employment on a large-scale. This is often, at least implicitly, the reason to highlight the need for an industrial policy. It does not work like that now. Manufacturing activity grows but creates very few jobs. New technologies have taken over the production system, highlighting trends already evident for many years.
The American example illustrates this phenomenon. The rebound in industrial activity has been strong without creating a lot of jobs. It is this dynamic that must be now understood when we look at the manufacturing sector. Europe will not escape this.

The chart below reflects this change. Since the low point in the second quarter of 2009 the U.S. manufacturing output has increased by 20%, while over the same period employment grew by only a mere 1%. Even from the bottom point of employment observed with lags compared to production (Q1 2010) the increase in employment is only 4%.

USA-en-2013-Q2-manufacturingSector-Index-Employment

We also see that the index level of manufacturing production does not reflect spontaneously a matter related to de-industrialization. The decline in employment reflects a profound change in the productive process.

The manufacturing recovery has been without any real job creation. This reflects the fact that the production process is now conditioned by technology which is the main driver of the process. This deep change has definitely modified the balance of the production function in favor of capital and technology to the detriment of jobs.
Jobs associated with this process are no longer of the same nature than in the past. Many tasks are automated and controlled by machines and  the number of jobs needed to produce dropped dramatically. These issues have been developed in a recent and exciting book by Andrew McAfee and Erik Brynjolfsson (“Race against the Machine” see here) and more recently in a post by Andrew McAfee (see here). Technology is changing the way of sustainable production processes and future innovations will further accentuate this phenomenon (see the paper by Joel Mokyr here). See here for a more critical approach.

The U.S. economy is currently implementing these processes based on technology  that will generate additional productivity gains.
Europe and France will have to face the same issue. The manufacturing industry with an important place for technologies in the production process will no longer create jobs on a large-scale. To cope with this situation it will be important to create the conditions that will facilitate the creation of new jobs in other sectors.
The major challenge is there. The manufacturing sector generates productivity gains that must be redistributed to the rest of the economy.

Two remarks on these productivity gains:

1 – These productivity gains will have to spread in the service sector. The use of new technologies will have to create new activities in services. In the short-term, these changes will  create resistance from sectors that are disrupted by this new balance of strength. The new competitive situation permitted by the use of new technologies undermines what worked so far. The rules of the game change creating difficult transitions, sometimes perceived as impossible.
Structural reforms talked about so often at the heart of this rupture and they have to facilitate these transitions. New technologies profoundly alter the boundary of existing activities. Structural reforms are intended to hustle previous situations in order to facilitate the emergence of new activities.
We must constantly renew the dynamics of the productive activity to generate new revenue and new jobs in the long-term. This process is not  ultimately destructive of jobs  but causes jobs elsewhere, in other sectors of the economy. This is this allocation of resources that structural reforms need to facilitate.
The stakes are high but we must change the rules and allow the entry of new players and the emergence of new sectors.
Beyond issues related to the crisis, structural reforms should improve the allocation of resources and the possibility of adapting the economies of Europe and France in particular to the dynamics of tomorrow. This is a kind of revolution specifically in France. The revolution will not come mainly from resistance in factories but from all the sectors of services where competition rules will change dramatically. People already in place will have to change the way they work accepting the new rules. That’s why the French government has to implement these latter instead new sectors will not be able to develop and to renew the source of economic growth.

2 -There is also a question about the distribution of these gains. In the past when a factory engendered such gains, they were distributed between capital (the factory owner) and employees thereof. Employees were solvent due to this income before becoming consumers (Fordism). This income distribution has been efficient for a long time period. But it is no longer the case. This is no longer what is observed as employment is no longer created on a large-scale in factories.
Productivity gains resulting from the use of new technologies will generate significant revenues and their distribution has to be analyzed.
Will this income tend to feed corporate profits and to those already benefiting from higher incomes, as it is already the case in the United States? (See here Emmanuel Saez updated September 3, 2013 with the numbers 2012 analysis). Or should we focus on a more equitable redistribution of these gains and in what form?
Here there is an equity issue in Western societies.

The world is changing very quickly and the production structures even more quickly.
The implementation of new technologies on production processes will, after the United States, apply to the Euro Area and to Europe. We must rethink the industry dynamics to facilitate the contagion, the propagation of these new technologies and these new products to the rest of the economy. That is the purpose of industrial policy.
Europe will not escape this break except to accept decline. It is necessary to create conditions for the implementation of this new environment, cause a strong and long-lasting momentum, facilitate the resources allocation in these production processes and finally recreate the urge to create and be in Europe. The issue of industrial production is there and its purpose is not nostalgic but to create the conditions for a revival.

 A pdf version of this document is available here : 2_Remarks_on_Industrial_Policy_&_Employment-NAM-PW-09-11-13

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s