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Globalisation, productivity and jobs

07 February 2017 | Markets and Economy

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In this excerpt from a webcast that aired in the United States recently, Vanguard Chief Economist Joe Davis says advances in technology and industrial productivity – not globalisation – are largely responsible for the seeming decline of manufacturing in the developed world.

Rebecca Katz: Why don't we pivot a little bit to Europe, since we started to touch on overseas. We keep referring to this, the headlines in Italy today, which are basically that the prime minister is set to resign, and we know that there have been elections, or pending elections, in France and in Germany; we had Brexit earlier this year. How do all of these affect market dynamics in the rest of the world? And this is a question from Carling.

Joe Davis: Well, theoretically how it should work is if there's a greater uncertainty after an election regardless of where you reside, that would say all else equal, that's a headwind for the markets and for growth. Markets, they don't like uncertainty. Uncertainty tends to stall business investment or consumer spending for a time until, you and I know, what's going to happen and if you're a small business, or any business manager, you may say, "I'm going to hold off." Historically, that has been at the margin a depressant for growth.

But I think there's a broader – I'll get to some of this now, Rebecca, all those events that you say, there's a common thread throughout all of them, and I know globalisation is taking it on the chin, but let me say two things.

If globalisation is the root cause of all of these events, then you would expect, say, manufacturing jobs, I mean, I'm just going to call a spade a spade from an economic analysis, you expect manufacturing jobs to be rising in many countries and falling in the United States. The fact is, they've fallen in every developed market in the world.

So, the biggest reason for the job losses, or I would say for the efficiency gains, has been technology. That explains, by academic studies, roughly 85% of the job losses, or I should put it this way, of the lack of job growth in manufacturing globally is due to greater efficiency gains. In fact, manufacturing is probably the most efficient and productive sector of the global economy, which is why output has doubled over the past five years even though job growth has been flat.

So, I wouldn't expect to see a rapid rise in manufacturing jobs employment in part because of the technology that is at work. And I think in computerised digital technology, we're going to see some of these – it's both a tail wind, because that means higher standards of living because of higher productivity growth, but it does mean that, you know, if one is hoping for a very strong rapid rise in employment in the manufacturing sector, I don't think given the analysis, I don't think we're going to see a rapid increase to what we saw, say, 20 or 30 years ago to the level that we're at.

Rebecca Katz: Right. It's different types of jobs. The robots come in, and the jobs shift.

Joe Davis: Well, let's also be fair, some of the jobs that have – not all, so I'm, I have to be careful here, I'm trying not to – it's a very politically charged topic. But I can tell you, some of the jobs globally that have been lost, not all, but some of them are actually, they weren't the most high-paying and most productive.

Actually, some of the – I would argue the manufacturing industry in the United States is actually the most productive sector of the US economy. It's the strongest. That's why it tends to not add as many jobs as other sectors, because it is so efficient with technology, machinery, and so forth, robotics.

And so, there's other – the US is still probably the most productive of all the manufacturing countries of the world. China is not nearly as productive or efficient, which is why at the margin they have tended to add jobs, because they're not as efficient and productive.

Rebecca Katz: Right. They need bodies to actually do that.

Joe Davis: Their wages are lower. Now again, where that equilibrium or that fair point is, how one defines fair, probably every single viewer on this webcast has a different definition of fair, but there is a technological backdrop to the trends that we are seeing, which means, you know, we'll tend to see more of these headwinds politically over the next few years. But, there's a lot in this. It's not globalisation as if some country is losing and all these other countries are winning.

Actually, there's efficiency gains which is good for global economy, but to say that jobs have gone away here and they've sprouted everywhere else is actually not in the data. The manufacturing share of the economy has fallen in many industrialised countries.

Important information:

This video is directed at professional investors and should not be distributed to or relied upon by retail investors.

It is designed for use by, and is directed only at persons resident in the UK.

This video was produced by The Vanguard Group, Inc. It is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

The opinions expressed in this video are those of the individual speakers and may not be representative of The Vanguard Group, Inc.

Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.

VAM-2017-01-12-4232

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