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Manufacturing Productivity outstrips Gains in Service Sector … But is the lack of new young blood a threat of terminal decline?

Recently published data from ONS (Oct 2014) provides compelling evidence of significant productivity gains in UK Manufacturing.  Manufacturing gains have not only outstripped those made in the service sector, but also the whole economy.

Like many stories this is one of two sides. Sadly these gains have been in a market that has remained flat and thus driven by a substantial reduction in the manufacturing workforce.

 

Productivity since the early 1990s has been broad based across the manufacturing sector as a whole and each manufacturing sub-industry has contributed. There is some evidence to suggest that outsourcing of lower productivity activities by the manufacturing sector to the service sector has had some influence on these productivity statistics.

Changes in labour input have consistently acted as a drag on manufacturing output growth due to the falling number of hours worked within the industry – this can be seen by the dark red bars in the Figure below. This partly reflects the changing composition of the UK manufacturing industry – a more capital intensive and efficient production process, and outsourcing of low technical manufacturing to developing economies may both have impacted the number of people employed in the industry.

Contributions to change in Gross Value Added, 1994-2012

By contrast, changes in capital input – generally shows a small but positive contribution to output growth. However, a range of other factors can affect manufacturing output: these are split into labour composition (improvements to the skill set and experience of the workforce) and multifactor productivity (increases in productivity that cannot be attributed to either changes in capital or labour input – for example improvements in the underlying production technology, or the way in which the combined factors of production are used in the production process).

Increase in R&D investment may be a driver of manufacturing productivity growth.  Manufacturing R&D investment has increased from £9.7 billion in 2001 to £12.2 billion in 2012; this has resulted in an increase in expenditure as a proportion of manufactured product sales from 3.2% to 3.4% over the period. Just over 70% of all business R&D expenditure in 2012, despite the manufacturing industry only accounting for 10% of the economy in GVA (Gross Value Added) terms.

But is the lack of new young blood a threat of terminal decline?  Workforce quality has changed by virtue of a declining proportion of those without qualifications and increase in those with GCSE’s and degrees.

Perhaps most worrying is the decline in the share of 16-29 year olds, suggesting an inevitable shift away from the sector and with a corresponding increase in 50+ year olds.

 

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