Source: United Nations Statistical Division.
Note: The sharp drop in the GDP share of manufacturing for China between 2003 and 2004 is the outcome of a statistical redefinition. In previous years manufacturing was included with mining and utilities. From 2004, manufacturing was reported independently.
The shift in the contribution of manufacturing to the economy cannot be effectively linked with a drop in manufacturing output or declining standards of living, At the global level, the share of manufacturing in relation to global GDP dropped from about 26.7% in 1970 to 15.6% in 2017. This decline must be nuanced by the following factors:
- Productivity growth. Implies more output per worker so that, at the aggregate level, a similar level of production can be maintained with a declining number of workers. This is in part linked to higher levels of mechanization and capital investment. As the history of innovation in manufacturing underlines, manufacturing has consistently been more labor-saving than a job-creating endeavor. The goal is not to create employment but to increase output. While adding labor usually was the main means to achieve such a goal, mechanization and automation can be used to increase productivity without significant addition of labor. Consequently, the price of manufactured goods is getting lower in comparison to the price of services and income levels.
- Outsourcing. The practice of having activities that used to be performed within a corporation subcontracted to external providers has substantially helped promote productivity by reducing costs. This also resulted from removing the outsourced activities, mainly related to management and services, that used to be included in the manufacturing input costs into the service sector. For instance, if a manufacturing corporation outsources a share of its human resources (e.g. payroll) to a specialized service firm, these input costs are essentially “transferred” to the service sector without any fundamental change in the manufacturing level.
- Offshoring. The transfer of an organizational or production function to another country, whether the work is outsourced or stays within the same corporation. An economy can consume an increasing amount of manufactured goods while seeing little change, and even a decline, in the share of its manufacturing sector in the GDP. Also, a manufacturer could, through offshoring, double its output and sales while its contribution to the manufacturing output of its home country could decline.
- Added value. The function of large manufacturing firms has substantially changed as production tends to take a lower share of the added value of a good. A growing share of the added value and the economic contribution of a contemporary manufactured product is derived from non-manufacturing activities. This is particularly the case for mass-market consumer goods, where the bulk of the economic contribution is derived from sales, distribution, and marketing. Personal computing devices, such as computers and mobile phones, are associated with a vast array of non-manufacturing activities contributing more to the GDP than their fabrication.
Under such circumstances, the declining share of manufacturing among the world’s largest economies should be interpreted with caution as manufacturing is taking a dimension substantially different than its conventional role focusing on production.