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Why the Australian economy still needs manufacturing

The automotive industry may have moved on, but Australian manufacturing continues to represent a core source of economic prosperity for Australia. Julian Smith/AAP

With major employers heading offshore and employment numbers decimated, what will emerge from the ashes of Australia’s manufacturing industry? And what role should manufacturing play in the federal government’s competitiveness agenda? In this Reinventing Manufacturing series, we look at the case for retaining the industry, and how it can transform itself into a high performance, advanced and productive sector.

Over the last half century, manufacturing employment as a proportion of total employment has been in long-term decline.

Although many have predicted the eventual death of manufacturing, and some have even suggested it is inevitable, there are a number of reasons why policy makers should invest in the future of manufacturing.

Manufacturing and economic prosperity

Writing in The Conversation earlier this year, Professor Tim Mazzarol highlighted a clear link between economic growth and the presence of a viable manufacturing sector. This reflects a number of factors, including a direct relationship between the expansion of manufacturing and flows of new direct foreign investment, a critical connection between manufacturing and the development of new technologies and other innovations; and manufacturing as a driver of national productivity growth.

This does not appear to be true for most service-based industries. While these sectors are generating an increasing proportion of jobs, they do not appear to be associated with the same aggregate effect on productivity growth or innovation. Based on this evidence, Mazzarol concluded that:

“…the Australian economy cannot maintain long term growth and high living standards on the back of agriculture, mining and services alone. Manufacturing still matters.”

The quality of manufacturing jobs

This virtuous link between economic performance and manufacturing appears to extend to the quality of jobs. Speaking on the importance of manufacturing for the resilience of the the US economy, Princeton economist, Danni Rodrik has suggested why this is the case:

“We may live in a post-industrial age, in which information technologies, biotech, and high-value services have become drivers of economic growth, but countries ignore the health of their manufacturing industries at their peril. High-tech services demand specialised skills and create few jobs, so their contribution to aggregate employment is bound to remain limited. Manufacturing, on the other hand, can absorb large numbers of workers with moderate skills, providing them with stable jobs and good benefits. For most countries, therefore, it remains a potent source of high-wage employment.”

But is this true for Australia? Has manufacturing continued to deliver high-quality jobs, even in a period where it has been forced to undergo significant restructuring and reform?

Over the last 20 years, manufacturing employment has halved, slipping from 14.2% of the workforce to just 8.2% – a fall of almost 50% - which has been most concentrated in the states of Victoria and South Australia. In terms of the size of the total labour force, however, the decline in employment has in fact been far less dramatic. In net terms, since 1994 employment in the sector has fallen from 1.1 million to approximately 950,000 workers – or a decline of around 15%. In fact, manufacturing remains the fourth largest sector in the Australian economy in terms of total jobs, behind healthcare and social assistance, retail, and construction.

Perhaps most surprising has been the resilience in the quality of jobs generated by the manufacturing sector. The key indicators of job quality provided by the Australian Bureau of Statistics data are employment status and whether employees receive paid leave entitlements. In manufacturing, well over 80% of jobs are full-time, and the majority of these come with the full suite of employee benefits, including paid leave.

In other words, there has been a relatively low propensity to turn manufacturing jobs into less secure jobs through casualisation or the use of independent contractors. While these proportions have declined since 1993 – the sector has generally maintained a high proportion of standard jobs. Moreover, Jeff Borland’s analysis of ABS data shows manufacturing is now of roughly equal importance across all states, not just the traditional manufacturing heartlands of Victoria and South Australia.

We can compare this situation to the quality of jobs created in those industries that have been responsible for generating enough jobs to absorb Australia’s expanding labour force. The retail sector accounts for around 11% of the labour force – or 1.25 million employees. Of these just over half are employed part-time (50.8%) or receive paid leave entitlements (53.4%). In construction, while the overwhelming majority of workers are employed full-time, fewer than half receive paid leave.

The future of manufacturing

All in all, the evidence overwhelmingly suggests the Australian manufacturing sector has, even in a period of decline, continued to represent a core source of economic prosperity for Australia – and should continue to do so. In short, it has outperformed many other sectors in terms of its contribution to Australia’s sustained economic performance and its capacity to generate quality jobs. It still produces around 6.5% of Australia’s GDP.

Does this mean there is a strong case in favour of ongoing government support in the form of protections and subsidies for the sector (notably the automotive sector)? In my view it does not. Protection will accompany the continued decline of manufacturing as it fails to respond to real economic forces that are signalling the need for change.

Nor does it mean government – or industry leaders – should leave the sector to limp along with no support or assistance in re-inventing itself.

The Australian manufacturing sector needs both market-based competition and concerted action from governments, industry leaders, unions and those cities and regions dependent on the health of sector for their future. This remains an issue that we have yet to fully grapple with. The sooner we do so the better we will be able to manage the transition without significant costs or unnecessary disruption.

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