The Employment Impact of Differences in Dmand and Production

3   Job Creation in Vertically Integrated Sectors:

Manufacturing vs. Service Industries

Actual demand patterns have been shifting strongly towards services, as noted for all
industrialized economies (see e.g. Feinstein, 1999). The scale of this shift in the six economies is
shown for final demand and consumption in Table 2. The share of services has risen in every
category, in some cases by as much as 16 percentage points. If services are income elastic, high-
income economies will tend to consume more services. If the demand for services creates more
jobs, then these economies will also tend to be high employment economies. This line of
argument is sometimes put forward as an explanation of the superior employment performance
of the US relative to most European economies. We first address the issue of whether, on the
VIS basis, manufacturing and service outputs show systematic differences in terms of
employment generated.

See Table 2

In order to asses its validity we allocate sectors into two broad groups, Manufacturing and
Services, and calculate the average number of jobs created on a VIS basis by the injection of one
unit of final demand into each sector in the group.⁶ The results are presented in Table 3. These
show clearly that there is no simple story of manufacturing generating more jobs than services,
or vice versa. On average, the number of jobs generated economy-wide when final demand is
allocated to Manufacturing is of the same order of magnitude as when it is allocated to Services.
This result is robust both over time and across countries. Moreover, contrary to the received
wisdom, in the US and the UK demand for Manufactures generates more jobs than an equal
demand for Services. In the continental European economies, on the other hand, demand for
Services generally generates more jobs than an equal amount of demand for Manufactures.

⁶ Manufacturing comprises: Agriculture (ISIC 1), Mining and Quarrying (ISIC 2), Manufacturing (ISIC3), Public Utilities
(ISIC 4), and Construction (ISIC 5). Services comprise: Wholesale Retail and Trade, Hotel and Restaurants (ISIC
6), Transport and Communications (ISIC 7), Finance, Insurance, Real Estate and Business Services (ISIC 8), and
Community, Social and Personal Services (ISIC 9).

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