IMF remains upbeat on global shift in employment

The relentless decline in manufacturing workforces need not increase inequality or weigh on productivity growth, the IMF says.

The International Monetary Fund has reassured its member nations, including Australia, that the relentless decline in manufacturing workforces need not increase inequality or weigh on productivity growth, which was waning in most countries.

The latest World Economic Outlook, released overnight in part in Washington DC, said the expansion of services within rich countries, which now make up more than two thirds of most economies, shouldn’t be a concern.

“A shift in employment from manufacturing to services need not hinder economy-wide productivity growth,” the IMF said in its latest Outlook. “Most of the rise in earnings inequality within countries came from the rise in pay inequality within industry and services,” it added, a reference to rising ratios of executive pay to median wages within firms common across a range of industries.

Observers commonly put the slowdown in productivity in rich countries since the financial crisis down to the rising share of services, what economist call the “Baumol cost disease”, named after the late economist William Baumol who first spelt out the phenomenon.

Because services were thought to be inherently less able to improve their productivity or efficiency over time (such as hairdressing or a musical performance), their increased prevalence in the economy would hobble national productivity growth.

In common with most countries, the IMF estimated manufacturers’ share of employment had fallen by almost 30 per cent since 1960, the fifth largest fall among 20 advanced countries surveyed.

“While the displacement of workers from manufacturing to services in advanced economies has coincided with a rise in labour income inequality, the increase was mainly driven by larger disparities in earnings across all sectors,” it added.

In a separate chapter, the IMF said ageing and the global financial crisis could explain a significant share of the decline in the participation of men during the past decade. Since the late 1970s, female participation in the workforce in Australia, for instance, has increased from 48 to 60 per cent, while male participation has fallen from 80  to 71 per cent.

“Labor market policies and institutions, together with structural changes and gains in educational attainment, account for the bulk of the dramatic increase in the labour force attachment of prime-age women and older workers in the past three decades,” it said.