Saturday, October 01, 2005

The Decline in the Percent of Employment in Manufacturing

This week's Economist Magazine has a piece on recent trends in manufacturing. In richer nations, a declining share of workers are employed in this sector. Is this good or bad?

To cite one good blog; " It's not clear to me that a shift of employment from manufacturing to services makes all workers better off, so I'm not willing to follow The Economist and conclude it is necessarily a good thing."

1. This blogger is setting a very high hurdle for determining what is "good". Usually economists use a hicksian pareto optimality criteria which says that a shock (such as a decline in manufacturing) is "good" if the winners from the change win more than the losers lose. In this case, in theory, the winners could compensate the losers for their losses and everyone could be made better off.

2. My read of the Economist and Mark Thoma's blog is that both ignored an important externality benefit of this sectoral shift. Environmental quality improves as manufacturing declines. Within the manufacturing sector, some industries such as steel and chemicals are dirtier than others but on average service sector creates less air, water pollution than manufacturing.

As manufacturing declines, I predict that the oldest least productive plants are closed first. These production plants tend to be the dirtiest plants because their technological vintage is old and they are often grandfathered by regulation that treats "new sources" differently than pre-existing pollution sources.

3. Many labor economists have documented that manufacturing jobs pay better than service jobs and this distributional effect should be accounted for when judging whether this sectoral transition is "good"

As economists, our job is to focus on efficiency --- urban manufacturing decline is a "good thing" because it sharply reduces urban pollution externalities in densely populated places where millions of potential "victims" live nearby.