Explaining Deindustrialization: How Affluence, Productivity Growth, and Globalization Diminish Manufacturing Employment

This study analyzes why the world's most economically advanced countries have deindustrialized over the last few decades. Previous research focuses on three causal factors: (1) rising consumer affluence and its propensity to increase demand for services more than for manufactured goods, (2) faster productivity growth in the manufacturing sector relative to other sectors, and (3) expanding trade linkages between the North and the South of the global economy. The relative importance of these factors, however, is not fully understood, because previous research has not tested all of these explanations simultaneously nor considered the indirect channels through which global trade may cause deindustrialization. This study tests the three factors with two-way fixed-effects regression models and panel data on 18 OECD countries from 1970 to 2003. The results indicate that each factor makes significant contributions to deindustrialization, and that global trade exerts both direct and indirect effects on employment patterns in economically advanced countries, but that the single greatest factor comes from the steadily rising affluence of consumers in these countries.