Economics Conversations: Does Manufacturing Matter?

manufacturing

In today’s second conversations session of term we’re looking at UK manufacturing. Since 1970 it’s fallen from 27% of the UK economy to 10% in 2013. The snapshot of a table from a government report into manufacturing, shown above, shows that this decline in relative importance is not confined to the UK.

Nonetheless, many worry about this de-industrialisation trend, both here and in America. Why do folk worry? Arguments range from there being something intrinsically healthy in making things, through to the impact on the trade balance, and the provision of jobs in particular for those who would struggle to earn as well in non-manufacturing industries. In the case of the UK, it is argued the ever increasing levels of inequality and regional imbalances all draw from the decline in the importance of manufacturing.

Evidence of the latter appears quite clear from the decline in many former industrial areas of the UK, but need it be the case? Why haven’t firms moved into these areas given that there are large amounts of unemployed labour that could be employed relatively cheaply? Where generally there’s land to be used which again is relatively cheap compared to the South East? Why haven’t such workers been re-trained to be equipped to work in other lines of work?

An Economist article makes a number of points against the arguments emphasising the importance of manufacturing; while the balance in goods might look bad, the US and UK are more than ample enough exporters of services to make up for that imbalance, and if manufacturing was providing high paid work disproportionately given the relative levels of productivity¬†and hence value added (as suggested by the idea that it provided high wage jobs for those that wouldn’t get them elsewhere), then this might be symptomatic of why the industry has been in decline.

What are your thoughts? Come along at 1pm to the next Economics Conversations event!

Unemployment Down but a Rate Rise Unlikely

Two macroeconomic stories have adorned the main headlines on the BBC website in the last 24 hours.

First, Mark Carney, current Governor of the Bank of England, ruled out interest rate rises in the near future – highly unlikely in 2016, it seems. Then this morning the news is that unemployment, the number of people not in work but seeking work (hence counted as part of the labour force) is at its lowest level since 2005.

As with many economic variables, a change in any direction is not unambiguously a good thing; for interest rates, which have been low for many years now, this is good for borrowers (for example, people with mortgages to buy houses), but bad for savers. This is because the rate the Bank of England sets heavily influences the rates set by banks around the country, so borrowers will continue to have to pay back their loans on lower interest rates, but savers will continue to earn very little interest on their savings.

The reality that the Bank doesn’t think a rate rise is likely implies the Bank thinks the prospects for economic growth are not so great; this comes on the back of the Chancellor’s warning about a dangerous cocktail of factors affecting UK growth in the coming year. Prospects for growth have reduced.

This comes, though, in stark contrast to the good news from the labour market. That unemployment is falling is generally a good thing – it’s hard to think of particularly convincing reasons why it wouldn’t be. Sometimes people point out that the fall might be based only on workers going into short-term or zero-hours contracts, or part-time or self-employment, all of which are seen as less secure jobs for workers, and signs not of high confidence amongst employers.

It may also be that some are back to work, but the 5% that remain have been out of work for a long time and are starting to become discouraged. If people have stopped looking for work, they stop being classed as unemployed and hence the unemployment rate can fall due to this. It is quite standard that after recessions the number of long-term unemployed increases, and while this does not excuse the reality or make light of it, it does present a problem for the government in attempting to find policies to get such people back into the workforce.

Immigration and Sport

At a time when public sentiment regarding immigration has perhaps never been more negative (in recorded times at least), the Rugby Football Union has just started a global search for its new head coach. Apparently South African Jake White is favourite. The appeal is obvious, as White won the World Cup as South Africa coach in 2007. The explanation also, of course, is straight forward in terms of the apparent contradiction: we don’t mind skilled foreigners coming here, it’s the non-skilled ones we apparently have an issue with, and the illegal ones.

This is, of course, labour economics, and feeds into macroeconomics as one of the key macroeconomic variables we’ll spend some time looking at is unemployment. We’ll also spend time thinking about globalisation, too. Unemployment, most simply, is an excess supply of labour: more people looking for work than there are firms looking for workers – at the current market price.

This simple description covers over a multitude of complexities; different types of work have different supplies of labour – hence governments worry about skills shortages, which are insufficient levels of the supply of labour in particular industries. Most people support the idea that we should allow immigration in areas where skills shortages are most acute, and one could quite easily make the case that in elite sport management, that is the case. In football, no Englishman has won the Premier League since its conception in 1992, and in rugby we all know the abject failure of the England team at their World Cup in the last few months.

However, even this is debatable. Some would (and do) argue that English candidates could still do a perfectly good job; after the last non-English football manager, Capello, the Football Association felt compelled to search only for an English candidate. It may well be true: the labour market is one characterised by huge uncertainties: will somebody do well in this job? Can those looking to fill positions necessarily identify the best workers for those roles?

Faced with all these difficulties even at the firm level, it seems very optimistic to think that at an industry level it’s possible to know whether there’s a skill shortage or not?

All sorts of questions you can start to think about asking as you study economics…