Why the Service Economy is Good for US

Imag from : psyberartist

Over the course of the last 60 years, the U.S. economy largely become a service economy, with services growing from 52% of jobs in 1950 to nearly 78% of jobs by 2006 (Hodson & Sullivan, 2008).  While many in the mainstream media appear to bemoan the loss of manufacturing jobs and view the loss as an indicator signaling the decline of the U.S. economy, many see the shift to a service economy as normal process of economic maturation.  Additionally, the shift to a service economy has occurred largely during a period of sustained economic growth.  While typical processes of economic maturation are at work, the U.S. shift to a service economy has unique features that are concerning, like manufacturing job loss, outsourcing, and a shrinking middle class.  Additionally, the pervasive use of information technology in the service sector is a unique feature of the economy that may portend additional economic and wage growth. The shift to a service economy likely has lasting implications for the U.S. economy and may have a lasting impact on U.S. economic power on the global stage.

The economic shift from agriculture to manufacturing and eventually to services describes the well-known evolution of a maturing economy.  According to the World Bank, “these two consecutive shifts are called industrialization and post-industrialization”(Soubbotina, 2004, p. 64). These economic shifts occur as a result of gains in per capita income; as individual income grows, the requirement for food reaches a limit and more is spent on material goods and as the demands for goods are met, more income is spent on services (Soubbotina, 2004).  In a sense, per capita income growth resulting in changing patters of consumer spending is a significant driver of the shift to a services economy.  Bureau of Labor Statistics economist Mitra Toosi (2002) found more than 60% of U.S. employment is generated by consumer spending “with consumers increasingly shifting their purchases to a sophisticated array of personal services” (p. 1).

In addition to shifting consumer needs, increased manufacturing productivity and globalization have also influenced the shift to services.  The popular press often decries the loss of manufacturing jobs and the resulting impact on the U.S. economy, frequently laying blame on outsourced manufacturing to developing countries.  However, Collins and Ryan (2007) found technology-driven manufacturing productivity improvements created more job loss than outsourced jobs.  Former Secretary of Labor and Chancellor’s Professor of Public Policy at the University of California at Berkeley, Robert Reich (2009) vividly described the impact of manufacturing technology on a factory floor:

I recently toured a U.S. factory containing two employees and 400 computerized robots. The two live people sat in front of computer screens and instructed the robots. In a few years this factory won’t have a single employee on site, except for an occasional visiting technician who repairs and upgrades the robots. (p. 1)

Of course, globalization plays a minor, albeit increasing role in the loss of U.S. manufacturing jobs as well, because of the advantage achieved because of inexpensive transportation, lower trade barriers, and cheap labor. However, a Congressional Report found that only 20% of manufacturing job loss since 2000 were a result of trade deficits caused by forces of globalization and those losses were likely ameliorated by job gains elsewhere or reclassification of manufacturing jobs into service jobs (Elwell, 2004).

Of more concern to the service sector is the growing divide between rich and poor resulting in a shrinking middle class.  Some might argue that the shift to a service economy itself is the cause of the growing divide, because service sector jobs appear to be split between low-paying service industries and high-paying service industries (Hodson & Sullivan, 2008).   Low-paying service industries include “retail trade, repair services, personal services, entertainment and recreation services” (Hodson & Sullivan, 2008, p. 249).  There is likely a variety of causes for low-wages in some of the specific low-paying occupations in the service sector.  Personal services, entertainment and recreation services all typically utilize discretionary spending, which are often the first services to be cut during tough economic times.  Another potential cause of low wages in some low-paying service sectors is lack of unionization.  Unions have had some success targeting lower-tier jobs, like janitors and hotel workers (Hodson & Sullivan, 2008), but have struggled with corporations like Walmart, that use strong, anti-union, tactics to prevent unions from gaining a toehold into their organization (Greenwald, 2005).  While low-paying service sector jobs clearly have an influence on service wages as a whole, recent Bureau of Labor Statistics data from May of 2011 show that average wages of private service sector jobs are now slightly higher than average wages of manufacturing jobs (U.S. Bureau of Labor Statistics, 2011).  Therefore, service sector wages are not a sufficient cause of the growing gap between rich and poor.

Rather, government policy is a more likely culprit.  For decades, the U.S. Government has consistently chipped away at the social safety nets put in place by FDR and later by Lyndon Johnson.  In 1996, Clinton passed the Personal Responsibility and Work Opportunity Reconciliation Act, forcing millions of former welfare recipients into the workforce (Wolf, 2006).  Moreover, the taxation policies of the last 30 years have favored the wealthy and placed additional tax burdens on poor and middle-class workers.  Reich (2011) describes the shift in tax policy:

It halved the top income tax rate from the range of 70 to 90 percent … to 28 to 35 percent; allowed many of the nation’s rich to treat their income as capital gains subject to no more than 15 percent tax; and shrunk inheritance taxes that affected only the top-most 1.5 percent of earners. Yet at the same time, America boosted sales and payroll taxes, both of which took a bigger chunk out of the pay the middle class and the poor. (p. 1)

Accordingly, government policies have had a much higher impact on the gap between rich and poor than low-paying service sector jobs.  However, it is important to note, that even with the current challenges in the U.S. service sector, there are bright spots as well.

For example, many of the new service sector jobs are based on what we might call the knowledge economy, a specific class of jobs in the service economy whose value is rooted in information and oftentimes makes use of information technology to innovate.  Bell (1976) describes the post-industrial importance of information in a services economy by indicating, “what counts is not raw muscle power, or energy, but information” (p. 127).  The World Bank considers technological innovation in the knowledge economy as the primary source of productivity, competitive advantage, and the resulting economic growth in the service sector(Soubbotina, 2004).  As a result of both the opportunity space that low productivity inherent in services provides (Hodson & Sullivan, 2008) and continued technological innovation, the services economy is likely to be a continued source of economic growth.

Because of the continued technological innovation and progress, the United States remains a force to be reckoned with on the world stage, although there are signs that U.S. economic standing is weakening.  Recently, Standard and Poor’s, issued negative outlook because of the government’s failure to deal with the national debt in a productive way.  Additionally, some worry that China’s economic rise means a decline in U.S. economic standing.  However, a 2007 Congressional Report found that China’s meteoric economic ascendency will likely have little negative impact on U.S. economic power and may actually grow the U.S. economy (Elwell, Labonte, & Morrison, 2008).

In conclusion, the growth of the service sector has been a boon to U.S. economic growth and the trend will likely continue.  There is little evidence to suggest the service sector is the cause for the growing gap between rich and poor, nor has the service economy negatively influenced U.S. economic standing in the world.  Rather, the continued innovation prevalent in the service sector will likely be a continued source of U.S. economic growth.  Of course, there are significant economic challenges facing the United States, largely wrought by government policy, including a taxation policy that favors the wealthy and a national debt that is affecting U.S. economic power abroad.


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