IMF Study Finds Manufacturing Expansion Depends on Stronger STEM Workforce

As countries around the world push to revive manufacturing, a new study from the International Monetary Fund (IMF) argues that governments may be missing a deeper problem: firms and workers are both waiting for each other to move first.

The IMF Working Paper, written by economists Shisham Adhikari and Si Guo from the IMF’s Western Hemisphere Department and the University of California, Davis, says manufacturing growth is often trapped in a cycle. Companies hesitate to expand because they cannot find enough workers with technical and STEM-related skills. At the same time, students avoid expensive technical education because manufacturing jobs are too limited or uncertain.

The result is a “chicken-and-egg” problem that keeps industrial growth weak, especially in developing economies.

Why Manufacturing Falls Behind

The study explains that manufacturing is different from most service industries because it requires heavy upfront investment. Firms spend large amounts on machinery, equipment, and technology before hiring workers.

But once companies make those investments, they lose bargaining power because the money is already sunk. Workers can then negotiate for higher wages, leaving firms with a smaller share of the returns. Anticipating this situation, firms often invest less than what would actually benefit the economy.

This problem is especially serious in manufacturing because factories are far more capital-intensive than service businesses. As firms underinvest, they create fewer jobs, which then discourages workers from entering engineering, technology, and other STEM fields.

According to the researchers, this creates a long-term trap: weak manufacturing sectors reduce incentives for technical education, while a shortage of skilled workers prevents industrial expansion.

The Global Divide in STEM and Industry

The paper uses international data to show a strong link between industrial employment and STEM education.

Countries with larger manufacturing sectors also tend to produce more graduates in engineering, mathematics, information technology, and related technical fields. East Asian economies such as China and South Korea have far higher industrial employment shares than many Latin American economies, and they also produce many more STEM graduates.

The researchers argue that this relationship works both ways. Strong manufacturing sectors attract more students into technical education because industrial jobs offer stable careers and higher wages. In turn, a larger pool of skilled workers makes it easier for firms to expand factories and production.

To show how workers respond to labor demand, the study examines petroleum-engineering enrollment in the United States during periods of rising oil prices. Enrollment surged during oil booms, especially in states such as Texas and North Dakota, and then fell sharply when oil prices collapsed. The findings suggest students closely follow job opportunities when deciding what to study.

When Investment Subsidies Are Enough

One of the study’s biggest conclusions is that the right industrial policy depends on how labor markets function.

In economies where workers already receive a fair share of the gains from industrial growth, governments may only need to support firms directly. Investment subsidies, tax credits, or incentives for factory expansion can encourage companies to create more jobs. As industrial employment grows, workers naturally become more willing to pursue technical training.

Under this scenario, the study says governments do not necessarily need to subsidize STEM education separately. Better manufacturing opportunities alone can increase skill supply over time.

The researchers describe this as a situation where fixing firm-side investment problems automatically improves worker incentives.

Why Many Economies Need Worker Support Too

The paper argues, however, that many real-world labor markets no longer fit this ideal case. Declining unionization, weaker labor protections, and rising labor-market concentration have reduced workers’ bargaining power in many countries.

When workers receive too little benefit from industrial jobs, they are less willing to invest in costly STEM education, even if governments subsidize firms. In this situation, factory incentives alone are not enough.

The researchers conclude that governments must support both sides of the market: firms need incentives to invest, while workers need help paying for technical education and training.

Using Chile as a case study, the paper estimates that correcting these distortions could significantly raise manufacturing productivity, industrial employment, and overall economic output. The findings also suggest that trade openness can strengthen manufacturing by increasing export demand and improving incentives for technical skill development.

Overall, the study delivers a simple message for policymakers: rebuilding manufacturing is not just about building factories. It is also about creating enough opportunity for workers to believe technical skills are worth the investment.