Impact of flexible labour market arrangements in the machinery electrical and electronic industries

Report for discussion at the Tripartite Meeting on
the Impact of Flexible labour market Arrangements
in theMachinery, Electrical and Electronic Industries

Part 2    

Copyright ® 1999 International Labour Organization (ILO)

2. Global trends in the sector

International production --international sourcing of components in an integrated production chain -- plays a significant role in the machinery industry (electrical and non-electrical). Across sectors in general, a long-term trend can be discerned towards increased international outsourcing of intermediate production inputs in search of cost and quality advantages. Wide international outsourcing has been especially pronounced in technology-intensive industries, such as computers, motor vehicles, electronics and aerospace, as well as consumer goods such as textiles and clothing.⁽¹⁾ Closer integration of southern countries in the global economy, as reflected in imports of manufactured goods from these economies, is significantly linked with the decline in manufacturing employment that has been observed in virtually all OECD countries in the last 25 years, while intra-OECD trade has only had a minor impact, consistent with the fact that these countries exchange goods with similar factor intensity. Several interrelated forces are at play, although their relative importance remains a subject of much debate: faster productivity growth in manufacturing relative to services, changing natural and human resource endowments and factor prices, outsourcing, capital accumulation in the South and trade liberalization.⁽²⁾

2.1. Relocating employment to
low-cost countries

International outsourcing in the manufacture of machinery (electrical and non-electrical) is reflected in the growing share in world employment of countries other than high-income OECD nations, while the share of the former group in total world net output (measured as value added in current US dollars) has fallen. Geographic distribution, however, remains sharply contrasted. High-income OECD countries account for a third of world employment, but over two-thirds of total net output. The shares for various groups of countries, classified by levels of income, are shown in figure 2.1. The employment charts in figure 2.1, however, are not quite comparable with the value added charts with respect to their geographic coverage. Data on value added were missing for several countries, most notably the former USSR, Czechoslovakia and Yugoslavia, which jointly account for about a quarter of world employment. To facilitate comparisons, these countries have been included in the group "others." As a result, the shares in total net output of other regions are somewhat overstated in the charts.

Eastern Europe and Asia have been the main beneficiaries of the shift in the geography of production during this period. Western manufacturers are increasingly producing the lower part of their product range in Eastern European countries, where production costs are low. The Japanese industry is using nearby developing Asian nations in a similar manner to build regional production networks, especially in electrical machinery (inclusive of electronics).⁽³⁾ At the international level, in 1996, 23 of the top 30 companies in the machine tool industry had operations outside their home country; nine were producing in more than four countries.⁽⁴⁾

Bearing in mind the shortcomings in the geographic coverage of the data, between 1980 and 1992, the latest year for which comprehensive international data are available, total world employment in the sector increased by 12 per cent (4.6 million jobs) and production by 113 per cent (measured as value added in current US dollars). The employment increase was accompanied by an important shift in favour of low-income countries in particular. High-income OECD countries reduced their share in world total employment from 36 to 30 per cent and maintained their share in total net output at 89-90 per cent. Low-income countries increased their share in world employment from 22 to 32 per cent, although their share in net output fell from 3.7 to 2.5 per cent. These figures, which amplify the information in figure 2.1, are reported in table 2.1.

The largest employment loss in the sector, of 832,000 between 1980 and 1992, was registered in high-income OECD countries, consistent with the long-term decline of manufacturing employment in the region. This decline occurred primarily during the economic downturns of the early 1980s and early 1990s. Middle-income countries experienced a decrease in employment over the period of about the same absolute amount -- substantially larger than high-income OECD countries in percentage terms. Conversely, other groups of countries expanded employment over the period.

Table 2.1. Geographical distribution of employment and production
(measured as value added) in the manufacture of machinery
(ISIC 382-383), 1980 and 1992 (per cent of world total) ¹

Between 1990 and 1997, the employment record remained rather poor in both subsectors in high-income OECD countries, but was better in electrical than in non-electrical machinery; the incidence of employment losses was still somewhat higher in the nineties than in the eighties in both subsectors, but more so for non-electrical machinery. Nearly a dozen countries were able to regain or surpass the 1990 levels of employment in one or both subsectors: in non-electrical machinery, in decreasing order, the Republic of Korea, Canada, Ireland, the United States, New Zealand, Norway, Portugal and the United Kingdom; and in electrical machinery, Luxembourg, Ireland, Norway, Finland, Italy, New Zealand, the United States and the Republic of Korea (see tables 2.2 and 2.3). There were signs of a recovery, or at least a respite in the decline, in another four cases (Austria, the Netherlands, Sweden and Switzerland). Thus, between 1992 and 1997, the United States added 411,000 jobs in this sector, to reach a total of 3.8 million employees in November 1997.⁽⁵⁾ Strong growth was also registered in the Republic of Korea, which created 117,000 jobs between 1992 and 1995, followed by the United Kingdom with 85,000 jobs and Canada with 14,600 jobs (see table L, The industry in numbers).⁽⁶⁾ But this still fails to fully offset the employment loss the high-income OECD countries have experienced during the 1980-92 period. Further, nearly three-quarters of leading firms in the machinery industry expanded employment between 1996 and 1997, according to the Financial Times' Global 500 list (see table 2.4), which ranks companies according to the market value of their shares; however, 44 per cent are American and 33 per cent Japanese.

As a result of job displacements, the share of low-income countries in world employment in 1992 was the largest, at 32 per cent. In the machinery industries in general, low-income countries also created the most employment in absolute numbers; between 1980 and 1992, the number increased from 8.6 to 14.3 million jobs. In 1992, China alone accounted for nearly 30 per cent of world employment, having thus become the largest employer in the sector after several years of steady growth, followed by the countries of the former USSR with 24 per cent and the United States, which accounted for less than 8 per cent. These shares are reported in table 2.5, which provides a comprehensive cross-section for the year 1992 of the data discussed in this chapter (all the variables are expressed in current US dollars and can therefore serve to draw international comparisons; the same set of countries has been used to create the charts shown in figure 2.1). By 1994, however, China had again lost 2 million jobs; the small increase in the manufacture of electrical machinery and electronics somewhat offset the substantial loss registered in non-electrical machinery industries. This trend might continue as foreign investors reassess their investment plans based on past performance, which often fell short of expectations, and on other structural problems; the enthusiasm for Sino-foreign joint ventures has apparently cooled.⁽⁷⁾

Former centrally planned economies of Central and Eastern Europe gained more than 0.3 million jobs between 1980 and 1989, prior to their integration in the world economy, which in the short term was catastrophic for employment and production. In the years following that integration, available evidence indicates that employment in machinery industries more or less halved in most countries of the region: Bulgaria, Croatia, Czech Republic, Kyrgyzstan, Poland, Romania and Slovakia. In Latvia, by 1994, production had dropped to a quarter of its pre-1989 level. In Germany, lay-offs in the engineering industry led to a further employment reduction of 60,000 between 1995 and 1997.⁽⁸⁾ Hungary seems to be the only country of the region to have registered a recovery in 1994-95 (see table L, The industry in numbers).

Table 2.2. Manufacture of machinery, except electrical, in high-income
OECD countries (ISIC 382, Rev.2), 1990-97 (1990 = 100)

Table 2.3. Manufacture of electrical machinery in high-income
OECD countries (ISIC 383, Rev.2), 1990-97 (1990 = 100)

Table 2.4. Machinery and electrical companies in the Financial Times Global 500, 1996-97