Business as usual as City pay soars while manufacturing stagnates

George Osborne promised a ‘march of the makers’ but as yet there is little sign that a resurgence of manufacturing is helping the economy to rebalance

Craig Berry100x100As late as 1980, manufacturing represented around 30 per cent of the UK’s gross value added (GVA) and employed around a quarter of the workforce. But it now represents around 12 per cent of GVA and employs less than 10 per cent of the workforce.

It would be naïve to assume that manufacturing in the UK will return to its former glory in the foreseeable future. However, a smaller manufacturing sector need not be equated with poorer performance. Retention of high-skilled manufacturing jobs, as low-skilled jobs migrate to emerging economies, would mean higher manufacturing productivity and a focus on ‘advanced’ production.

Such a transformation would also improve the tradability of the UK’s manufacturing output and enhance the dispersion of skills and technology from manufacturing to other areas of the economy. Currently, as the coalition government’s 2011 ‘plan for growth’ acknowledged, just over 40 per cent of UK manufacturing firms are involved in technological innovation, lower than Germany at over 70 per cent, and Sweden and Finland at around 50 per cent.

Crucially, the growth plan also promised a reduced reliance on financial services. The first SPERI British Political Economy Brief, ‘Pay in Manufacturing and Finance’, published yesterday, therefore assesses the extent to which a rebalancing of this nature is evident, by examining levels of pay across different sectors.

From the perspective of economic rebalancing, the news is not good. It is worth reflecting for a moment, however, on some of the good news that has come out of the manufacturing sector in recent weeks. A recent survey of the CBI’s manufacturing members found 35 per cent of firms reporting ‘above normal’ orders, compared to 23 per cent reporting ‘below normal’ – a positive gap of 12 percentage points, bigger than any point since February 1995. Manufacturing output has grown alongside the general economic recovery evident in 2013.

Yet if there were rebalancing (as well as recovery) of the economy towards manufacturing and away from financial services, we would also expect to see a closing up of the pay gap between the two sectors. Higher pay in manufacturing would also demonstrate the sector was becoming more productive.

Unfortunately, the latest data offers little suggestion of rebalancing. At the beginning of 2000 manufacturing workers were paid around 20 per cent more than the national average. By September 2013 this had fallen to around 15 per cent, although there has been a slight closing up since 2008. In contrast, the pay gap between the finance and insurance sector and the national average has largely been maintained. It fell from around 90 per cent in January 2000 to around 70 per cent in September 2008, but has since recovered to around 85 per cent.

An even more worrying trend is the receding gap between pay in manufacturing and pay in real estate activities (that is, housing market-related employment). In September 2003 manufacturing workers were paid 13 per cent more than real estate workers, but this has now fallen to 9 per cent. In the past five years alone, real estate workers have gone from being paid 2 per cent below the national average, to 6 per cent above.

High-skilled workers are therefore more likely to be attracted away from the tradable and technology-intense manufacturing, to an industry requiring lower, generic skills which is highly prone to frequent downturns. This helps to explain the paradox whereby manufacturing output is growing, but exports are falling. We are making more stuff, but not enough of the high value-added products that other countries want to buy.

Evidence on pay points us to another important trend: the failure of sectoral rebalancing in the UK economy is also the failure of geographical rebalancing. Manufacturing is concentrated in the North and the West Midlands. London has a lower proportion of people employed in manufacturing than any other region, but of course dominates employment in finance and the housing market.

In fairness to the coalition government, it may of course be premature to conclude that they have failed to rebalance the economy. The rhetoric of party politics and demands of 24-hour media invite us to imagine that governments are omnipotent, and therefore exclusively to blame should their policies fail to deliver immediate results. Clearly, this is not the case, and it may take many years – even decades – for sectoral rebalancing efforts to bear fruit. Indeed, there is evidence that the coalition government has sought to direct more investment to manufacturing in the UK.

However, this support pales in comparison with the much more significant effort to boost the housing market, and by implication financial services, through Help to Buy, Funding for Lending and low interest rates. It seems, therefore, that not only is sectoral rebalancing yet to materialise, but the government has largely abandoned efforts to bring it about.

This post originally appeared on The Conversation.