The resurgence of industrial policy – safeguarding jobs in future-fit sectors

In this blog, we discuss how to safeguard a just transition for workers whilst enabling the green transformation at the speed and scale required. Wisely employed, industrial policy can scale up clean technologies, improve the quality of jobs and democratically influence what is produced and how.

by Jakob Hafele

A prosperous future for Europe requires thriving industries that provide people with decent work in sustainable sectors.

To achieve this, industrial policy – which can be understood as state intervention aimed at transforming economic activity toward some public good – is experiencing something of a resurgence. Governments around the globe are embracing industrial policy as they attempt to speed-up the green transformation and respond to state interventions in other countries and global trade tensions.

The task of tackling the climate emergency is monumental. From devasting floods in Pakistan to parched rivers in Europe, the droughts experienced in the United States, and the extreme heatwaves that have plagued China, we are already experiencing its impacts. To alter course, European economies must undergo a fundamental paradigm shift, aligning both consumption and production structures with the limits set by our planetary boundaries. In short, this calls for a reimagining of how our economies function.

Market failure

Up to now, governments have largely attempted to deliver climate action and bring about a just transition with a laissez-faire approach to economic policy. This has meant that economic policy has benefited or disincentivised all companies equally. This worked very well for the second half of the past century when the economy was geared towards wealth maximisation. But in the 21st century, governments need to actively steer our economies in a different direction to bring us back within planetary boundaries while still delivering high levels of human wellbeing and prosperity.

This requires a new regulatory framework that allows those businesses that help us create a sustainable future to thrive while stopping economic activities that harm the planet or exploit workers. Fortunately, governments are now stepping in and taking a much more proactive approach to shift their industries.

Recent examples of industrial policy interventions currently include China’s ‘Made in China 2025’ programme and the U.S.’ ‘Inflation Reduction Act’. In 2023, the EU introduced its own industrial policy strategy: the ‘Green Deal Industrial Plan’. With it, the EU aims to “enhance the competitiveness of Europe’s net-zero industry and support the fast transition to climate neutrality”. The Plan aims to provide a more supportive environment for the scaling up of the EU’s manufacturing capacity for net-zero technologies and products.

The State is now increasingly assuming the role of an entrepreneurial agent to drive the green transformation. China’s solar panel industry – which was supported by state intervention for its initial growth – exemplifies this. In 2015 China surpassed Germany as the world’s largest producer of photovoltaic energy, and is now by far the world’s largest producer, exporting to more than 200 countries. And in the same vein, the European Commission has eased its state aid rules so member states can promote net-zero technologies and firms.

Using industrial policies to scale-up green industries and technologies is crucial. But it is just part of the solution. Ecologically harmful sectors must also be transformed or face market exit. Redirecting technologies and workers from ecologically harmful activities to sustainable production is essential for this process.

Industrial restructuring could have significant economic and social consequences. For instance, the transformation of the German automotive industry alone is estimated to impact around 180,000 workers (Agora Verkehrswende, 2021). And while the transformation will lead to new jobs in green sectors, these new jobs will not necessarily match existing jobs in terms of their skill requirements. A 50-year-old coal miner might not easily find a new job in solar panel production, for example. Thus, in addition to technological capabilities and ecological factors like emission intensity it is important to consider skill complementarities when deciding which green industries should be supported.

A policy framework for a just transition 

To address the challenges of industrial restructuring, we propose a policy framework for industrial policy. Our framework consists of two key steps aimed at safeguarding a just transition for workers while securing the speed and scale of the green transformation.

  • Step 1: Identifying non-future-fit sectors

The first critical aspect of the policy framework is to identify emission-intensive sectors with limited potential to remain competitive in the future (non-future-fit sectors). This identification phase determines sectors that are likely to undergo significant changes in the decarbonisation process. Popular examples of non-future-fit sectors are the coal and combustion engine industries. Excessive emission intensity, lack of significance, or the availability of environmentally superior alternatives often mean that protection of these sectors cannot be justified. Exceptions only arise in compelling cases where the protection of an industry is critical for a key value chain or for security reasons. For sectors that are not future-fit, it is necessary to actively manage their scaling down and/or phasing out to ensure a just transition for workers without severe disruption and unemployment.

  • Step 2: Identifying complementary future-fit sectors

In parallel to identifying non-future-fit sectors, it is important to identify sectors with strong economic potential that can effectively absorb workers from declining sectors (complementary future-fit sectors). These complementary sectors should match the displaced workers in terms of their localisation and the required skills in order to make re-skilling realistic. This step is especially relevant when non-future-fit sectors are less significant or lack viable alternatives. To take the example of the declining coal and combustion engine industries, it will be crucial to identify complementary sectors to which affected workers can transition.

In some cases, it is possible to identify multiple complementary future-fit sectors which workers can transition into. In other cases, there may be limited options for transition. Governments need to identify and recognise these limitations so they can anticipate challenges and put in place safeguards for affected workers. Indeed, governments can play a pivotal role in supporting skill development and retraining initiatives to make sure workers have the right skills for the green transformation. For instance, in the late 20th Century the Japanese and Korean governments implemented ’retraining programmes’ for the workers of written-off industries to limit opposition to structural transformation processes. Similarly, Sweden recently adopted an agreement to make the Swedish labour market more ready with respect to social and ecological goals, which includes significant funding for retraining workers.

Proactively ensuring that workers from non-future-fit sectors aren’t left stranded is key to social cohesion over the course of the impending industrial restructuring. Adult education and skills training are vital for resilient economies able to withstand shocks and stay on track for long-term environmental and social goals.

We hope our framework can help policymakers to design of industrial policy interventions and safeguard future-fit jobs in future-fit sectors.

Read our discussion paper for more!