Karl Williams is Deputy Research Director at the Centre for Policy Studies.
There is much to be said for having a larger share of the workforce employed in advanced manufacturing – not least as a way to reduce demand for government. More manufacturing jobs would mean more men and women better able to support their families with less state support; fewer public sector jobs propping up local economies in former industrial heartlands; and more opportunities in those places for young people who might otherwise sink into addiction, debt and crime.
How come? Higher real wages tend to mean less demand on the welfare state, for obvious reasons. And just consider how median wages in top-end manufacturing jobs compare to the national average: petrochemicals +60 per cent; transport equipment +28 per cent; pharmaceuticals +21 per cent; basic metals +17 per cent; computer electronics and optical components +15 per cent; motor vehicles +15 per cent; machinery and equipment +12 per cent; and chemicals +11 per cent.
Above average wages reflect relatively robust levels of productivity and productivity growth. Some manufacturing jobs pay less and are less productive than average, notably in industries dominated by unskilled migrant labour, such as textiles. But even so, manufacturing productivity – measured in terms of output per hour worked – increased at an annual average rate of 1.9 per cent in the decade from 2010, triple the average rate of services (0.6 per cent).
Today around 2.7 million workers are employed in manufacturing, including 1.1 million in the especially high gross value added (GVA) categories listed above. Those 2.7 million people amount to about eight per cent of the UK workforce.
However, this share is the lowest in the G7, a third lower than the OECD average. How did it come to this?
By 1950, Britain had long since ceased to be the ‘workshop of the world’. But we were still by some measure the most industrialised nation the world has ever known, with 35 per cent of the workforce employed in the manufacturing sector. No other country – not Germany, not America, not even China today – has ever reached this pitch of hyper-industrialisation.
The decline in manufacturing over subsequent decades partly reflects the growth of services, which is normal for advanced economies. Rival countries such as Germany and Japan were also able to benefit from a clean technological slate, as they rebuilt their industries after the shock of the Second World War.
But there was nothing inevitable about the fact that Britain went from leading the pack to lagging the field. In fact, it was not Thatcher who killed our manufacturing sector, but her many predecessors. What could have been a fairly gradual change in the structure of the economy was held up as companies and jobs were kept on life-support by state intervention and taxpayer largesse. Manufacturing became trapped in what the economic historian Martin Daunton characterises as a ‘low-effort equilibrium’, with pent-up inefficiencies condemning the British economy to sclerosis.
When the dam did eventually break, around 1.5 million manufacturing jobs (net) were lost between 1979 and 1983, during the ultimately successful battle to tame inflation and turn the economy around. And many communities – often those now the focus of levelling up efforts – had no time to adapt: deindustrialisation was a sudden and traumatic process.
Yet if we are to revive manufacturing in Britain, and create more high-skill, high-wage manufacturing jobs, we need to be wary of attempts to revive a romanticised industrial past. Many of the jobs rendered untenable by time, technology and trade were dirty, dangerous and debilitating – unlike modern advanced manufacturing.
In particular, we need to recognise where politicians have gone wrong – not just in the postwar years, but more recently.
During the New Labour years, we built a political economy that implicitly and sometimes even explicitly discouraged investment in energy- and capital-intensive manufacturing. And the Conservatives followed suit. George Osborne cut Corporation Tax to make the UK more competitive. A welcome move. But it was funded largely by reducing incentives for capital investment. This explicitly privileged services over manufacturing, leaving us lagging far behind our peers.
As a result, Britain has gone from hyper-industrialised to hypo-industrialised. Many low-quality manufacturing jobs have disappeared, but not enough have been created higher up the value chain. While a major productivity and exports success story since 2010, UK manufacturing has remained static in terms of GVA share and the overall job numbers.
Of course, the structure of Britain’s economy partly reflects our comparative advantage in international finance, professional services and R&D. But it also reflects a comparative disadvantage in manufacturing stemming from the underlying economic model of the last few decades.
Rising energy prices, for example, were putting pressure on manufacturers long before Ukraine. In the rush to decarbonise, we have made insufficient provision for affordability and security during the energy transition, failing to build more nuclear and back fracking. Industrial electricity prices in Britain have risen by 74 per cent since 2010. Factories here pay more per kWh than in any other developed nation, making British goods less competitive. UK manufacturing now lives in the shadow of Ed Miliband’s 2008 Climate Change Act.
One way to escape high energy costs, at least in some industries, is through substitution of cheap labour. Yet as Rian Whitton points out, the UK had just 101 robots per 10,000 industrial workers in 2020 – 20 per cent below the global average and well behind our G7 peers. Although manufacturing capital investment has trended upwards slightly in recent years, at 8.5 per cent, it is still well below the 13 per cent of 1997. And there is plenty of evidence to suggest that mass immigration – net migration topped 100,000 for the first time in 1998 – has helped suppress investment.
At the same time as importing cheap labour to substitute for energy and capital, we are encouraging the misallocation of British talent. To realise a ‘knowledge economy’, Blair wanted 50 per cent of school leavers to go to university. But as rampant grade inflation and poor graduate outcomes show, this was based on a hopelessly Panglossian view of human nature. Not everyone – not even half of everyone – is suited to being a scientist, lawyer or financial wizard. This is belatedly being recognised. Yet post-Blair, manufacturing jobs, even in high-tech industries, are all too often still seen as low status, as somehow ‘dirty’.
Other long-term factors have undermined the further growth potential of advanced manufacturing too. At the Centre for Policy Studies we have written about these at length, including the broken planning system, an increasingly uncompetitive business tax system and limited access to finance.
Fundamentally though, the political economy inherited from New Labour is predicated on policies around the inputs of energy and labour that systematically undermine capital-intensive advanced manufacturing – but with little apparent benefit elsewhere. A radical rethink is needed – for example by adopting a Carbon Border Adjustment Mechanism (CBAM), as the CPS and many others have called for.
Some, of course, will say that the answer is industrial strategy. But there is little point to targeted state interventions to counter Biden’s Inflation Reduction Act if we cannot get the basics right.
If we can secure energy abundance, make it more rewarding to invest in new factories and new machinery, strip away the ludicrous obstacles and delays in the planning system, and improve vocational education and training, more investment and higher growth in advanced manufacturing will naturally follow. We are never going to return to the hyper-industrialised Britain of the nineteenth century. But a Britain in which the share of good jobs in manufacturing compares to our G7 peers is perfectly plausible. And with more skilled, dignified and well-paying manufacturing jobs, demand for government should be that little bit less.
Karl Williams is Deputy Research Director at the Centre for Policy Studies.
There is much to be said for having a larger share of the workforce employed in advanced manufacturing – not least as a way to reduce demand for government. More manufacturing jobs would mean more men and women better able to support their families with less state support; fewer public sector jobs propping up local economies in former industrial heartlands; and more opportunities in those places for young people who might otherwise sink into addiction, debt and crime.
How come? Higher real wages tend to mean less demand on the welfare state, for obvious reasons. And just consider how median wages in top-end manufacturing jobs compare to the national average: petrochemicals +60 per cent; transport equipment +28 per cent; pharmaceuticals +21 per cent; basic metals +17 per cent; computer electronics and optical components +15 per cent; motor vehicles +15 per cent; machinery and equipment +12 per cent; and chemicals +11 per cent.
Above average wages reflect relatively robust levels of productivity and productivity growth. Some manufacturing jobs pay less and are less productive than average, notably in industries dominated by unskilled migrant labour, such as textiles. But even so, manufacturing productivity – measured in terms of output per hour worked – increased at an annual average rate of 1.9 per cent in the decade from 2010, triple the average rate of services (0.6 per cent).
Today around 2.7 million workers are employed in manufacturing, including 1.1 million in the especially high gross value added (GVA) categories listed above. Those 2.7 million people amount to about eight per cent of the UK workforce.
However, this share is the lowest in the G7, a third lower than the OECD average. How did it come to this?
By 1950, Britain had long since ceased to be the ‘workshop of the world’. But we were still by some measure the most industrialised nation the world has ever known, with 35 per cent of the workforce employed in the manufacturing sector. No other country – not Germany, not America, not even China today – has ever reached this pitch of hyper-industrialisation.
The decline in manufacturing over subsequent decades partly reflects the growth of services, which is normal for advanced economies. Rival countries such as Germany and Japan were also able to benefit from a clean technological slate, as they rebuilt their industries after the shock of the Second World War.
But there was nothing inevitable about the fact that Britain went from leading the pack to lagging the field. In fact, it was not Thatcher who killed our manufacturing sector, but her many predecessors. What could have been a fairly gradual change in the structure of the economy was held up as companies and jobs were kept on life-support by state intervention and taxpayer largesse. Manufacturing became trapped in what the economic historian Martin Daunton characterises as a ‘low-effort equilibrium’, with pent-up inefficiencies condemning the British economy to sclerosis.
When the dam did eventually break, around 1.5 million manufacturing jobs (net) were lost between 1979 and 1983, during the ultimately successful battle to tame inflation and turn the economy around. And many communities – often those now the focus of levelling up efforts – had no time to adapt: deindustrialisation was a sudden and traumatic process.
Yet if we are to revive manufacturing in Britain, and create more high-skill, high-wage manufacturing jobs, we need to be wary of attempts to revive a romanticised industrial past. Many of the jobs rendered untenable by time, technology and trade were dirty, dangerous and debilitating – unlike modern advanced manufacturing.
In particular, we need to recognise where politicians have gone wrong – not just in the postwar years, but more recently.
During the New Labour years, we built a political economy that implicitly and sometimes even explicitly discouraged investment in energy- and capital-intensive manufacturing. And the Conservatives followed suit. George Osborne cut Corporation Tax to make the UK more competitive. A welcome move. But it was funded largely by reducing incentives for capital investment. This explicitly privileged services over manufacturing, leaving us lagging far behind our peers.
As a result, Britain has gone from hyper-industrialised to hypo-industrialised. Many low-quality manufacturing jobs have disappeared, but not enough have been created higher up the value chain. While a major productivity and exports success story since 2010, UK manufacturing has remained static in terms of GVA share and the overall job numbers.
Of course, the structure of Britain’s economy partly reflects our comparative advantage in international finance, professional services and R&D. But it also reflects a comparative disadvantage in manufacturing stemming from the underlying economic model of the last few decades.
Rising energy prices, for example, were putting pressure on manufacturers long before Ukraine. In the rush to decarbonise, we have made insufficient provision for affordability and security during the energy transition, failing to build more nuclear and back fracking. Industrial electricity prices in Britain have risen by 74 per cent since 2010. Factories here pay more per kWh than in any other developed nation, making British goods less competitive. UK manufacturing now lives in the shadow of Ed Miliband’s 2008 Climate Change Act.
One way to escape high energy costs, at least in some industries, is through substitution of cheap labour. Yet as Rian Whitton points out, the UK had just 101 robots per 10,000 industrial workers in 2020 – 20 per cent below the global average and well behind our G7 peers. Although manufacturing capital investment has trended upwards slightly in recent years, at 8.5 per cent, it is still well below the 13 per cent of 1997. And there is plenty of evidence to suggest that mass immigration – net migration topped 100,000 for the first time in 1998 – has helped suppress investment.
At the same time as importing cheap labour to substitute for energy and capital, we are encouraging the misallocation of British talent. To realise a ‘knowledge economy’, Blair wanted 50 per cent of school leavers to go to university. But as rampant grade inflation and poor graduate outcomes show, this was based on a hopelessly Panglossian view of human nature. Not everyone – not even half of everyone – is suited to being a scientist, lawyer or financial wizard. This is belatedly being recognised. Yet post-Blair, manufacturing jobs, even in high-tech industries, are all too often still seen as low status, as somehow ‘dirty’.
Other long-term factors have undermined the further growth potential of advanced manufacturing too. At the Centre for Policy Studies we have written about these at length, including the broken planning system, an increasingly uncompetitive business tax system and limited access to finance.
Fundamentally though, the political economy inherited from New Labour is predicated on policies around the inputs of energy and labour that systematically undermine capital-intensive advanced manufacturing – but with little apparent benefit elsewhere. A radical rethink is needed – for example by adopting a Carbon Border Adjustment Mechanism (CBAM), as the CPS and many others have called for.
Some, of course, will say that the answer is industrial strategy. But there is little point to targeted state interventions to counter Biden’s Inflation Reduction Act if we cannot get the basics right.
If we can secure energy abundance, make it more rewarding to invest in new factories and new machinery, strip away the ludicrous obstacles and delays in the planning system, and improve vocational education and training, more investment and higher growth in advanced manufacturing will naturally follow. We are never going to return to the hyper-industrialised Britain of the nineteenth century. But a Britain in which the share of good jobs in manufacturing compares to our G7 peers is perfectly plausible. And with more skilled, dignified and well-paying manufacturing jobs, demand for government should be that little bit less.