Manufacturing Jobs Lost to Imports, not Tariff Cuts

Have tariff cuts contributed significantly to our worsening employment situation?

As the facts appear to be clear to most people, this is a particularly dumb question.

Tariffs have been cut dramatically over the last decade and half -- with the average rate of assistance for the manufacturing sector being cut from 25% in 1983 to 6% in 1997.  During this period unemployment has ratcheted upward, the number of manufacturing jobs has falling sharply and the inequality in earnings between the skilled and unskilled has widened.

Nonetheless given the importance of the issue -- which goes to the heart of the debate about tariffs -- and the potential for hasty conclusions, the question is very worthy of investigation -- which what a group from the Industry Commission (IC) has done in a report published this month. [1]

The IC study found -- what many overseas studies have found -- that, although tariff reductions contributed to the worsening employment conditions in the manufacturing sector, their effect was relatively minor and overshadowed by other factors.

Only about one-tenth of the decline manufacturing employment sector over the last decade has been caused by tariffs cuts.  Tariffs cuts were also found to have had a very minor impact on the distribution of employment and wages between low skilled and high skilled workers.

The main cause -- representing around one-third -- of the overall decline in manufacturing employment was a shift in consumer preferences away from domestic manufactured goods to imports.  This change -- which took place in a similar manner across the manufacturing sector -- was driven, not by change in tariffs, but by tastes, demographics and costs.  For example, over this period consumers increasingly preferred imported small, compact cars and four wheel drives vehicles to Australian built family-size Falcons and Commodores -- despite the huge improvement in the quality of the locally built product

Technological change was also found to account for about a quarter of the estimated decline in manufacturing employment.  Put simply, the trend towards lighter, smaller and IT-intensive goods, has meant lower demand for manufacturing labour in all industries.

Although job losses in the manufacturing sector have been concentrated amongst the low skilled and particularly medium skilled -- while high-skilled manufacturing jobs have actually expanded -- this has not been driven by tariff cuts.  Tariffs are a very minor factor -- accounting for as little as 5% of the decline in the relative position of the low and medium-skilled wage earners.  Again technological change was the dominant factor.

Interestingly, wages of the unskilled have held up well relative to the high-skilled over the last decade in the manufacturing sector.

In terms of the labour market as a whole, the overwhelming reason for the decline in the wages of unskilled relative to skilled workers has been the growth in the service sector.  Over the last decade almost all new jobs have been in the service sector -- which now accounts for over 80% of all jobs.  Since the service sector has a wider dispersion in earnings between the high and low skilled, this trend is becoming increasing obvious in the overall job market.

What this all means is that we should not blame the ills of unemployment on industry reconstruction, and we should be careful about hasty conclusions.

Note:

1. G. Murtough, K. Pearson & P. Wreford, Trade Liberalisation and Earnings Distribution in Australia, Industry Commission.

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