Trends in Australian manufacturing

Manufacturing output has quadrupled since the mid-1950s. The fastest growing activities have been those with links to Australia's natural endowments and products that are more differentiated, with higher skill levels and R&D intensities.

Manufacturing growth, while strong, has not matched that of the services sector.

• Manufacturing accounted for one in four dollars of national output in the 1960s, but only one in eight by the turn of the century.
• The relative decline in manufacturing is a common feature of richer countries.

In contrast to the output story, manufacturing employment has declined somewhat both in relative and absolute terms over the long term, although stabilising since the early 1990s.

The relative decline in manufacturing has several causes and implications:

• on the output side, the relative decline mainly reflects Australians' preference for more services as incomes rise. Import competition from lower-wage developing economies has only been a small contributor;
• on the employment side, the decline is testimony to strong labour productivity growth, including from (high tech) capital investment;
• some service activities once categorised as part of manufacturing have been outsourced, though this effect is relatively modest;
• the impacts of structural change on unemployment have generally been moderate, though the effects have been bigger for some less competitive industries and regions; and
• regional dependence on manufacturing has fallen.

While productivity growth rates have been high compared with other sectors over the long term, manufacturing missed out on the (multifactor) productivity surge apparent for the market sector as a whole in the mid-1990s. However, productivity growth has been more vigorous in the last two years.

Manufacturing is increasingly globally oriented:

• exports increased from just over 15 per cent of manufacturing output in 1989-90 to around 24 per cent in 1999-2000, with import shares also rising.

Continuing rises in 'intra-industry trade' — exports and imports of similar products — suggest that Australian manufacturing can develop capabilities within most areas, even those where competitiveness has generally declined.

Australian manufacturing has changed considerably over time and is a picture of diversity, according to a research paper being released by the Productivity Commission.

The Commission's report, Trends in Australian Manufacturing, found that manufacturing output has quadrupled since the mid-1950s. The fastest growing activities have been those with links to Australia's natural endowments, and products that are more differentiated, have higher skill levels and R&D intensities.

But employment in manufacturing has fallen (until recent years) and manufacturing's share of the economy has waned with the rapid growth of the service sector. Manufacturing now accounts for around one in eight dollars of national output — half what it was in the 1960s, similar to the relative economic position it held in 1900.

The Commission says this relative decline is no cause for concern. Productivity Commission Chairman, Gary Banks said, 'Manufacturing's declining share of employment and output is testimony to its strong labour productivity growth and the growing importance of services as people's incomes have risen. The story is similar in most developed countries. It is a sign of economic success, not failure.'

The Commission found many positives in the performance of manufacturing:

• Structural change had mostly been achieved without enduring effects on unemployment, though the effects have been bigger for some less competitive industries and regions.
• Manufacturing has become increasingly globally oriented, with sustained export (and import) growth and strong inward and outward investment links.
• Continuing growth in 'intra-industry trade' — exports and imports of similar products — suggest that Australian manufacturing can develop at least niche capabilities within most industrial activities, even those where competitiveness has generally declined.

The report probes many other aspects of manufacturing's performance and role over the long term, including productivity, employment and labour market conditions, structural change and import competition.

Background information

Ralph Lattimore (Assistant Commissioner) 02 6240 3242

02 6240 3330

Preliminaries
Cover, Copyright, Foreword, Acknowledgments, Contents, Abbreviations, Overview

1 Introduction
1.1 Views on the role of manufacturing
1.2 Objectives of this study
1.3 What is meant by manufacturing?
1.4 Structure of the report

2 A snapshot of the contribution of manufacturing
2.1 Sectoral comparisons
2.2 Indirect contributions of manufacturing

3 The changing role of Australian manufacturing
3.1 Output growth in manufacturing and other sectors
3.2 What has happened to employment and capital in manufacturing and other sectors?
3.3 The reasons for the relative decline of manufacturing
3.4 The implications of 'deindustrialisation'

4 Changing trends within manufacturing
4.1 The composition of manufacturing
4.2 'Volatility' in Australian manufacturing
4.3 Structural change
4.4 Specialisation
4.5 Links between industries
4.6 Patterns in the regional distribution of manufacturing

5 The manufacturing labour market
5.1 Skill andeducation
5.2 Earnings and work intensity
5.3 Stability of employment
5.4 Casual jobs and other non-traditional employment in manufacturing
5.5 Industrial disputes
5.6 Unionisation
5.7 Industrial accidents
5.8 The role of small business in manufacturing

6 Openness and competitiveness of the Australian manufacturing sector
6.1 The increasing openness of the Australian manufacturing sector
6.2 Cross border ownership — evidence of an increasingly open manufacturing sector
6.3 Destination and sources of trade flows
6.4 Barriers to trade

7 Productivity
7.1 Aggregate manufacturing productivity over time
7.2 Productivity within manufacturing
7.3 Comparisons with other industries and countries
7.4 Explanations for the productivity experiences of manufacturing

A Industry classifications

B Output measures for manufacturing

C Trends in State and Territory manufacturing

D Changed inventory management

E Assessing vulnerability to structural change

F Sensitivity to GDP shocks

G Determining productivity peaks

H Budgetary assistance to industry
H.1 Commonwealth budgetary assistance
H.2 Other assistance

I Modelling productivity
I.1 Modelling industry-specific labour productivity differences
I.2 A time-series model of productivity in Australian manufacturing
I.3 Data errors and measurement issues
I.4 Productivity data

J Industry structure in OECD countries

K Sectoral contributions to Australian economic activity

L Input-output links for manufacturing industries

M Trade effects on manufacturing employment

N The Salter mechanism

O Trends in employment and activity
O.1 Trends in employment and activity
O.2 Links between industry classes

References