The future of manufacturing and its implications for government industry policy

| September 2, 2015

Manufacturing is critical for the creation of prosperity in any nation. Göran Roos explains how productivity improvements will change our employment landscape.

A nation’s potential to create prosperity is a direct function of its economic complexity. High economic complexity can be simplified to mean that a country produces and sells something that few other nations can produce and sell and that these items that are sold require a multitude of inputs where a high share of the value added is domestic.

This means that the provision of services have lower economic complexity than the products to the production of which they are inputs. It also means that the production of products have lower economic complexity than the production of tools necessary to produce the product. Finally it also means that the production of systems have higher economic complexity than the production of any of its constituent components or sub-systems.

This explains why manufacturing is critical for the creation of prosperity in any nation and why prosperous nations as a consequence of their high economic complexity have a large share of manufacturing in their economy (e.g. Japan, Germany, Switzerland, Sweden, etc.).

Manufacturing is, and has always been, in rapid development, and 21st century manufacturing bears very little resemblance to 20th century manufacturing (which is the mental picture most people get when the word manufacturing is used).

21st century manufacturing is highly servitized, has most of its manufacturing activities taking place in virtual space and deploys many of the key enabling technologies with their associate production systems. This has major implications for both productivity improvements as well as the role of people in these manufacturing activities. For most firms the productivity improvements will outstrip the underlying demand growth, which means that tomorrow’s demand can be satisfied with fewer employees.

In addition most firms will strive to make their fixed labour costs as variable as possible which will change the contractual arrangement between employer and employee (more part time work, more flexible work etc.).

Finally the competence requirements on employees will change and become broader – not only domain skills but also interpersonal skills, creative problem solving skills, inter- and trans- disciplinary team working skills etc. – and those without these skills or that do not maintain the relevance of their skill base will be left behind.

From an industry policy perspective it is imperative that the objective is to increase the economic complexity of the nation (to lay the foundation for prosperity growth) and that the policy environment is stable 10 years into the future. In addition, jobs can only be created if firstly if there is a substantial amount of firms that, in spite of world class productivity improvements, grow faster than this productivity improvement and if there is also a substantial start-up (normally focused upon) and scale-up (normally forgotten but much more important) activity.

The demand growth for labour have to cover both the reduction of labour in firms that exit or firms where productivity improvements outstrip the underlying demand growth and all those that get released out of the present and future service industry due to the dramatic productivity improvements enabled by automation of most service professions – around 50% of service professions which will disappear over the coming two decades.

Even if the technology development will enable a Schumpeterian creative destruction, the new jobs will not, over the coming decade, be generated in the same pace as the existing jobs are shed, and in addition these new jobs will require a skill and attitude level not generally available in the individuals that have been made redundant.