Deindustrialization

There is little agreement as to what ‘deindustrializa­tion’ actually means. For some time politicians on the left have used the term to mean loss of industrial employment. Others extend the term to include situ­ations of declining industrial output, and still others to include declining shares of employment or output.

We have shown that the UK has undergone deindustrialization on each and every one of these criteria. Declining industrial employment is not unusual in other advanced economies (see Table 1.6), and neither is a decline in the industrial sector’s share of employment (Table 1.5) or of GDP (Table 1.3). Where the UK is unusual is in the insignificant growth of non-oil industrial production in the 37 years since 1973.

Declining industrial employment need not be a problem; there is every indication that many British people would not freely choose industrial employ­ment. There will, however, be the problem of rising unemployment if declining industrial employment is not compensated by increasing non-industrial employ­ment. Until 1979 this problem did not arise; as we saw in Table 1.4, employment levels were broadly maintained until 1979, but the growth of service sec­tor employment between 1979 and the mid 1990s did not compensate for falling industrial employment. The costs of deindustrialization have been particularly felt in those regions where declining industries were concentrated. The Midlands, the North, Yorkshire and Humberside, the North West, Wales and Scotland all experienced a prolonged period with unemploy­ment rates well above 10% during the 1980s and early 1990s, as the industrial base contracted. However, there has been a considerable narrowing of the unem­ployment differential between regions as the recession of the early 1990s bit deep into the previously expand­ing service sector activities throughout the UK (see Chapter 23).

Some writers view these changes as part of a move towards a post-industrial society, where the main activities involve the creation and handling of infor­mation. However, a decline in the share of industrial activity within the economy would be less worrying if absolute industrial output had grown since 1973 at the same rate as in other advanced economies.

A decline in manufacturing activity may cause a still more serious employment impact than that given by the official statistics. This is because manufacturing is characterized by many more backward-linkages than is the service sector (Greenhalgh 1994). For example, in order to make cars the vehicle manufac­turer will buy in some engine components, metal products and textiles from other manufacturers and will also purchase the services of vehicle transporters, accountants, bankers, designers, etc. Manufacturing and services display very different patterns of inter­industry purchases, which can be examined using statistical input-output tables. In particular, the rate of purchase of service output by manufacturing firms is a much larger proportion per unit of gross out­put than is the purchase of manufactured goods for use as inputs by services. Whereas Greenhalgh found that each £1 spent on manufacturing gross output created £1.61 of employment income in all sectors, that same £1 spent on service gross output created only £0.56 of employment income in all sectors. Clearly manufacturing sustains a far higher propor­tion of jobs (directly and indirectly) than it might appear to us from data on sectoral shares, such as Table 1.4 above.

Deindustrialization may put not only these backward-linkages at risk but also a variety of forward-linkages. The suggestion here is that innova­tions, whether measured by patents or survey records, are heavily concentrated in the manufacturing sector. Again Greenhalgh (1994) found that 87% of innova­tions were developed in the manufacturing (and primary) sector, and 80% of all first commercial adoptions of innovations took place in this sector. Deindustrialization clearly puts at risk the ‘seed-corn’ of domestic technology, which in turn has balance of payments implications (see below) as UK trade becomes progressively geared to high-technology products.

The OECD (2005b) has confirmed this growing interconnectedness between manufacturing and ser­vice activities. It suggests that the amount of services embodied in one unit of final output has almost doubled from 8.2% to 15.7% since the early 1970s for the 10 countries included in the survey.