The Manufacturing Sector’s Evolution and Its Role in an Economy

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As economies develop, their three main sectors—agriculture, manufacturing and services—tend to follow specific patterns:

• The agriculture sector shrinks.
• The service sector grows.
• The manufacturing sector grows initially, and then begins to decline in favor of the service sector.

In a recent Economic Synopses essay, Economist Ana Maria Santacreu and Research Associate Heting Zhu examined international trends in the manufacturing and service sectors. For the period 2000-14, the authors pulled sector data from 24 countries on:

• Employment
• Value added
• International trade (via exports)
• Innovation (via research and development [R&D] spending)
• Labor productivity (via value added divided by employment)

The share of each sector is shown in the table below.

SOURCES: Organization for Economic Cooperation and Development database and authors' calculations.

Contribution to Employment and Value Added

Santacreu and Zhu’s first finding was that the service sector’s contribution to employment and value added outweighed the manufacturing sector’s contribution over that 15-year span.

“As technological change makes manufacturing more capital and skill intensive, this sector creates fewer jobs,” they wrote.

As they noted later, however, this finding has been well documented.

Contribution to Trade, Innovation and Productivity Growth

Their second finding regarding trends in the two sectors has been less well documented. Santacreu and Zhu found that despite notably lower shares of employment and value added, the manufacturing sector was still the top sector in terms of trade, innovation and productivity growth.

The authors noted that this isn’t surprising: Most services are not traded, most technological advances have taken place in the manufacturing sector, and productivity growth has focused mainly on the manufacturing sector. “In fact, several studies attribute the slowdown of productivity in the United States to the large increase of the service sector,” they wrote. “As consumers’ demand for goods becomes saturated, they gradually turn toward the service sector, in which it is harder to foster productivity growth as rapid as the manufacturing sector’s.”

Impacts of Manufacturing and Service Sector Evolution

Still, differences in these three areas—trade, innovation and productivity growth—between the evolutions of the manufacturing and service sectors may play a role in how countries develop and industrialize. Santacreu and Zhu noted several interesting differences in these evolutions.

Globalization

Services are becoming more globalized, as advancing technologies are helping them become more tradeable.

R&D Intensity

The service sector’s contribution to R&D spending as a percentage of value added (called R&D intensity) has grown over time. R&D intensity is considered a measure of innovation.

Innovation and Productivity Growth

As the authors noted: “[O]ur data appear to be consistent with the view that innovation is a major source of long-term productivity growth.” Indeed, productivity in the service sector has been increasing for the past several years.

Services within the Manufacturing Sector

Finally, the authors noted that services are used throughout the manufacturing sector in production. “Increasing globalization reinforces the relationship between the manufacturing and service sectors,” Santacreu and Zhu wrote. “Therefore, given the strong, positive correlation between R&D spending and productivity in the service sector, the evolution of innovation may determine the patterns of development and industrialization in the next few years.”

Additional Resources

• Economic Synopses: Manufacturing and Service Sector Roles in the Evolution of Innovation and Productivity
• On the Economy: Productivity Growth: Learn from Other Countries or Innovate Yourself?
• On the Economy: The New World Leader in Innovation