Outsourcing: Symptomatic of the Transition to the Idea Economy

Outsourcing is a concept that has been around for quite a while where a company can pay another company to run a portion of their business.  Carlson was one of the first companies to make a bundle by taking advantage of the opportunity to run the travel departments for large corporations.  Nowadays, outsourcing is commonplace in manufacturing, call centers, and back office functions and often means that work is placed offshore or nearshore, although that isn’t always the case.

Brym and Lie (2007) suggest that outsourced manufacturing to China is the cause of the manufacturing decline in the U.S, based on manufacturing job loss and then go on to note that free trade advocates would describe productivity gains as the culprit.  In their final analysis, Brym and Lie (2007) suggest that offshore and foreign outsourcing results in the loss of good American jobs which are replaced which bad jobs, laying average income decline and class inequality at the doorstep of free trade.  I think Brym and Lie are missing a couple of important points, namely the way in which trade raises everyone’s standard of living, technology’s role in job loss and job creation, and U.S. leadership of the knowledge economy.

Specialization has been creating surplus for workers since the beginning of work.  Smith (1776) first articulated the way in which trade benefits everyone, however Mankiw (2012) describes the concept more simply, noting that “trade allows countries to specialize in what they do best and enjoy a greater variety of goods and services” (p. 10).  Because of the law of comparative advantage, each party benefits during a trade, irrespective of who holds any absolute advantage (Mankiw, 2012).  Therefore, the notion of foreign outsourcing or offshoring is economically beneficial for both parties, despite the disruption to the lives of U.S. workers that lose their job.   The economic benefits are of using low cost labor pools is clear, as lower cost labor results in higher margins and lower prices for consumers (Brainard & Litan, 2004).  Of course, neither foreign workers nor greedy multinational corporations are to blame for job loss.  Instead, the culprit is technology.

Technological change is the number one cause of job destruction in the United States.  According to Drezner (2004) more than 22 million manufacturing jobs were destroyed between 1995 and 2002 through improved productivity, the result of improved factory technology.  Even the current ability to take advantage of low cost labor finds its origins in technology, the result of a global transportation network, a global communications network, and information technology.  The process of creative destruction is going to continue as businesses and governments develop new technology to create sustainable competitive advantage, bringing about further changes.  “For many, these changes will be acutely painful and impart serious consequences, while for others; technological change will bring unexpected opportunities and rewards” (Collins & Ryan, 2007, p. 7).   Some even think the growth of technology is changing our economy in fundamental ways.

While Brym and Lie (2007) describe the major economic revolutions as agricultural, manufacturing, and most recently services, each characterized with serious disruptions in the labor force; they do not suggest that the labor disruptions occurring now are part of another revolution.  Reich (2009) recognizes that the nature of skilled work is shifting towards what he calls symbolic analytic work, acknowledging that “a growing percent of every consumer dollar goes to people who analyze, manipulate, innovate and create” (p. 1).  I prefer to think of the latest economic revolution as a shift from the manufacturing and service economy to the idea economy.  Consider that in 2011, the global population grew past seven billion people, the majority of which are educated, and connected to the rest of the world through a global communications network.  What new ideas will be shaped as billions of people connect with each other through the Internet in a many-to-many communications medium?  Shirky (2010) is optimistic that humanity’s cognitive surplus will be put to good use, bringing new levels of creativity and generosity to our economies.  Another way to think about the idea economy is through the lens of symbolic interactionism.  Blumer (1969) noted that “humans act toward things on the basis of the meanings they ascribe to those things [and] the meaning of such things is derived from, or arises out of, the social interaction that one has with others and the society” (p. 2).  It stands to reason, that as more humans begin interacting with each other and society more often, and sharing their interactions, that new meaning will be creating and more human action will occur on the basis of that meaning.  In practical application, consider how quickly the concept of microfinancing spread, with one study identifying more than 750 million accounts in alternative financing institutions, a clear example of a creative idea that caused a shift in human action (Christen, Rosenberg, & Jayadeva, 2004).

In economic terms, the idea economy represents a shift from neoclassical economic theory to endogenous growth theory, diverging “by making technological change a function of economic incentives and behaviors” (Freeman, 2000, p. 9).  Cortright (2001) conveys the notion more succinctly in suggesting that while physical capital is subject to the notion of diminishing returns, ideas suffer under no such constraint.  The implication is that government can create conditions for economic growth by supporting technology innovation (Romer, 2008).

So is offshoring and outsourcing a good trend, bad trend, or a natural trend? And why?

Offshoring and outsourcing are good trends that provide short-run economic benefit and harm to displaced workers.  I believe that the outsourcing and offshoring of manufacturing and service jobs is the beginning of an economic revolution to an economy based on ideas, an area that the United States is poised to dominate because of our history of technological innovation and our leadership of the existing idea industries, like high technology, media and entertainment, healthcare, pharmaceuticals, life sciences, telecommunications, and information technology (Rock, 2011).  Workers displaced as a result of the shift will either find low-skilled service labor and take a pay cut, or obtain an education in the fields based on symbolic analytic work.


Blumer, H. (1969). Symbolic interactionism; perspective and method. Englewood Cliffs, N.J.,: Prentice-Hall.

Brainard, L., & Litan, R. E. (2004). “Offshoring” service jobs: Bane or boon and what to do? Brookings Policy Brief(132), 3.

Brym, R. J., & Lie, J. (2007). Sociology : your compass for a new world (Brief ed.). Belmont, CA: Thomson/Wadsworth.

Christen, R. P., Rosenberg, R., & Jayadeva, V. (2004). Financial institutions with a double bottom line: Implications for the future of microfinance (pp. 1-20): CGAP.

Collins, D., T. , & Ryan, M. H. (2007). The strategic implications of technology on job loss. Academy of Strategic Management Journal, 6, 27.

Cortright, J. (2001). New growth theory, technology, and learning: A practitioner’s guide Review of Economic Development Literature and Practice (Vol. 4, pp. 1-36). Portland, OR: U.S. Department of Commerce, Economic Development Administration.

Drezner, D. W. (2004). The outsourcing bogeyman. [Article]. Foreign Affairs, 83(3), 22-34.

Freeman, R. (2000, October 2000). What does modern growth analysis say about government policy toward growth. Paper presented at the HM Treasury Seminar, London, England.

Mankiw, N. G. (2012). Principles of macroeconomics (6th ed.). Mason, OH: South-Western Cengage Learning.

Reich, R. B. (2009). Manufacturing jobs are never coming back. Forbes. Retrieved from Forbes.com website: http://www.forbes.com/2009/05/28/robert-reich-manufacturing-business-economy.html

Rock, R. (2011, February 20). Endogenous Growth: The Future of U.S. Economic Dominance through Technology.  Retrieved from https://journey24pointoh.com/2012/02/13/endogenous-growth-the-future-of-u-s-economic-dominance-through-technology/

Romer, P. M. (2008). Economic Growth. The Concise Encyclopedia of Economics.  Retrieved February 12,, 2012, from http://www.econlib.org/library/Enc/EconomicGrowth.html

Shirky, C. (2010). Cognitive surplus : creativity and generosity in a connected age. New York: Penguin Press.

Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations. London, New York,: Printed for W. Strahan and T. Cadell. A. M. Kelley.




Business, the Web, and the Balance of Power

Image Source: webwizzard

Business has changed significantly over the last twenty years, particularly with the advent of the Internet and the World Wide Web, resulting in fundamental changes to the way business is conducted, as disruptive new business models replace industry norms.  The Internet and the Web have connected people and businesses in ways never before imaginable, creating significant new opportunities to create value and disrupt existing markets, as Google did to advertising, Amazon did to retail, and Netflix did to Blockbuster and the home DVD market.  It appears that many U.S. corporations exist in the space between the traditional business models of the 20th century and emergent business models characterized by fundamentally different consumer behaviors, and are likely to experience significant business disruption by both competitors and consumers alike that take advantage of a new balance of power inherent on the Web.

The Relationship between the Web and Power

         The Web has made revolutionary changes to people’s relationship with each other and with information, as the Web has become the de facto standard for communication and information access in our time (Smith, 2010).   Allowing people to communicate in ways never before imagined, the Web has also changed people’s relationship with media from largely a consumption culture to more of a participatory culture, where individuals are both consumers and producers of media (Shirky, 2009).  The change to a participatory culture has had profound implications on the way consumers interact with each other and with government and corporate institutions, as mainstream media institutions are no longer the sole gatekeepers of information, rather individuals and institutions are free to organize, collaborate, share, and develop media according to their own wants and needs (Shirky, 2009).  The result is that millions upon millions of people, or the crowd, are using the combined power of access to information and the ability to organize to gain power over government and corporate institutions.  Hanley (2010), describes the transformational nature of the web as a constant power struggle “in a constant ebb and flow of winners and losers” between individuals and governments, between consumers and corporations, and even between corporations, or between governments.

Naha Tug of War - Pentax 645D Full Size JPEG

However, it is not enough to note the power struggles without understanding the unique, power-sharing, nature of the web.

Power to Change Dominant Hierarchies

              The Web has demonstrated a significant range of capability to shift power balances or completely upend existing dominant hierarchies, and Social Dominance Theory is a useful lens to evaluate the power of the Web to create change.  Social Dominance Theory (SDT) is a general theory that explains the stability of social inequality in societies with an economic surplus, arguing that three systems, age, gender, and an arbitrary set, oriented on religion, race, nationality, class, ethnicity, or otherwise, combine to maintain dominant hierarchies (Sidanius & Pratto, 1999).  SDT argues the maintenance of inequality occurs not only with the application of force, intimidation, or discrimination practiced by dominants against subordinates, but rather, “the decisions and behaviours of individuals, the formation of new social practices, and the operations of institutions are shaped by legitimising myths…consensually held values, attitudes, beliefs, stereotypes, and cultural ideologies” (Pratto, Sidanius, & Levin, 2006, p. 275).   Legitimizing myths provide a means of justifying, either morally or intellectually, dominating behavior (Pratto, et al., 2006).  For example, a legitimizing myth about Mexican illegal aliens is that they are do not pay taxes, use an unequal share of social services, have higher rates of criminal activity, and take American jobs; a myth that was used to gain passage of the controversial Arizona law, SB1070 (Rock, 2011d).  How then, given the complex interplay between individual behaviors, institutional and societal practices, and cohesive power of legitimizing myths, are the power of dominant hierarchies changed by people using the Internet and the Web?

What is Different about the Web

            Dominant hierarchies are maintained with myths that focus on the trimorphic systems of differences, age, gender, and arbitrary differences like race, class, or ethnicity (Pratto, et al., 2006).  However, on the Web, identities are amorphous, sometimes anonymous, and crafted by individuals (Baym, 2010), eroding the power of the arbitrary-set system to dominate, by allowing individuals to choose which acculturation to accept or shed on a moment’s notice.  Simply put, individuals can shape their personas and this is a key difference from the physical world, that expects behaviors aligned with age, gender, and arbitrary-set systems.

The Web also serves to erode the power of legitimizing myths because the more than a quarter of the world’s population (Hanly, 2010) has access to the what amounts to the sum of human knowledge (Wesch, 2010).   Wesch describes the new media landscape as “ubiquitous computing, ubiquitous communication, ubiquitous information, about unlimited speed about everything, everywhere, from anywhere on all kinds of devices and this makes it ridiculously easy to connect, organize, share, collect, collaborate and publish” (Wesch, 2010).  Ubiquitous access to information makes it very difficult for myth to exist as anything but a myth, because facts and reality and the impact of legitimizing myths are spread across the web at blazing speeds in the form of images and videos that cannot hide fundamental truth, while the diffusion of the net resists attempts to suppress information.  Gilmore (2011) described the nature of the networks treatment of information as “the net interprets censorship as damage and routes around it”.   In the virtual environment, information flows freely and individuals and groups are able to challenge the assumptions of legitimizing myths will information, while circumventing the information control efforts of dominant hierarchy institutions, acting as gatekeepers, that may attempt to control information flow.   Examples of people using the Web to challenge dominant hierarchies are everywhere, including the Chinese people’s challenge to the government during the Sichaun earthquake (Shirky, 2009), the Iranian people’s challenge to the government following the 2009 Iranian Presidential Election (Hanly, 2010), and the recent Arab Spring in the Middle East that has overturned many existing regimes (Rock, 2011b).  The Web is a great equalizer that erodes the power of dominant hierarchies and changes the power dynamics between individuals and institutions, moderating the impact of dominant institutions, or in extreme examples, seizing control of dominant institutions.  While recent events have highlighted the effects of the Web on the balance of power between citizens and governments, what is the impact on business world?

The Web and Corporate Power

             It will come as no surprise to anyone that the business world is about profit.  To the extent that a corporation can dominate a market or industry, a corporation can expect to grow and pass along profits to its shareholders and the greater the profit, the greater the earnings of shareholders and corporate officers.   As noted in the introduction, the Web is having a disruptive affect on the corporate world, where some corporations are seeing their business models and practices challenged, and others are attempting to harness the Web to reach new customers and commoditize existing marketplace leaders.  What differentiates the businesses that take advantage of the new medium versus those that diminish?  What business characteristics allowed Amazon to disrupt first Borders and now Best Buy?  How did Netflix destroy Blockbuster so quickly?  What prevented Blockbuster and Borders, both companies with dominant market positions, significant capital, and great brand recognition, from capitalizing on the opportunity the Web provides?  Perhaps most importantly, what can companies with dominant market positions learn about the changing balance of power?

Corporations that dominate their respective markets are targets for disruption, because marketplace leaders have the highest expectations on their performance.  Well-run companies deliver consistent earnings by using technology to “transform labor, capital, materials, and information into products and services of greater value” (Christensen, 2000, p. xiii).  In the book, The Innovator’s Dilemma, Christensen (2000) argues that well-run companies avoid disruptive technology because disruptive technologies tend to have lower profit, smaller initial markets, and address customer’s future, rather than current, needs, and therefore, good business leaders are reluctant to invest.  Put another way, the investment is fraught with risk.  Were Blockbuster and Borders simply risk-averse organizations in a traditional innovator’s dilemma, or did Amazon, for example, have other advantages besides technical innovation?  To answer this question, we need to look to the equalizing power of the Web.

Image Source: Pink Sherbet Photography

As we examined earlier, ubiquitous access to information has an empowering quality and in the business world, the crowd of consumers can not only access more product and service information than ever before, but can also produce product and service information, creating far more consumer power than existed in previous generations.  Amazon is a great example of a company that harnesses the power of the crowd to provide product information in a metaphor that now dominates the retail industry as companies like Walmart, Best Buy, and others attempt to replicate the transparency and engagement Amazon provides.  In addition, Amazon recognized that the Web offered greater customer reach and the ability to commoditize brick and mortar stores that required expensive storefronts and the labor to operate them.  The result was compelling, as Amazon consumers were offered more information and cheaper products, but more importantly because consumers were offered product insights from other consumers.  Amazon understood that the Web could change the relationship between consumers and products and built a platform that enabled the consumers to engage in a direct relationship with product manufacturers in a show of both altruism and activism; altruistic when sharing positive product experiences, and active when sharing negative experiences.  In short, Amazon built its business on an understanding of changing consumer behavior enabled by the Web.

Risk and Opportunity: A Progressive Example

Image Source: khalid Albalh

In order to understand the changing power dynamics of the Web, I conducted an experiment that simply pitted a consumer and customer, namely me, against a dominant corporation, in this case Progressive Insurance Company.  The opportunity presented quite naturally as it simply required a corporation to behave in its own interests, rather than the interests of a single customer, a situation not terribly difficult to find.  I recently had a family outing on our boat and found that it was losing power and taking on water.  We quickly got the boat out of the water and found that the engine ruined because a mechanical malfunction allowed salt water into the engine.  After filing a claim with Progressive, the claims investigator took the claim information and determined that they would likely deny the claim.  I saw the opportunity to explore the power of social media and to observe what affect it might have.  I put up a blog on WordPress and registered the domain name of Progressivefail.org, putting the story of Progressive’s impending denial on the Web.  Next, I began posting links to existing customer stories of claim problems and consumer satisfaction surveys on Progressive’s track record of paying claims and published the posts via Facebook and Twitter (Rock, 2011c).  I also posted links to Progressives Facebook and Twitter sites and received an immediate response from Progressive’s Twitter account indicating they would look into it.  Within a day, the blog had 87 views and was the first hit on Google when searching for the term “progressive fail; within four days I had received 242 views and the check was in my hands.

The Progressive example highlights how the Web can shift the balance of power between a corporation and their customers.  By simply sharing customer stories on Progressive’s social network, a nearly immediate change took place.  The surprising element of the example is not the immediate payment, but the implication that a single consumer was able to use the Web and Progressive’s own social network to potentially inflict brand damage far beyond the monetary scope of the initial claim.  While Progressive likely intended their use of Facebook and Twitter to open a positive two-way asymmetrical dialogue with their customers, they opened themselves up to significant risk by simultaneously providing consumers with the ability to damage their brand and reputation.  In this example, Progressive is the dominant hierarchy and the legitimizing myth is that of capitalism; it is more necessary for Progressive to profit than to address the specific need of a single customer.

The implication is that a corporation that opens a two-way dialogue with customers on the Web has both risk and opportunity.  If the corporation treats its customers fairly, the Web will work in its favor, while the reverse holds true; should a corporation be perceived as unfair, customers have the power to negatively affect a corporation’s brand and either way, the Web has given consumers far more power over corporations than ever before.


Image Source: Maia C

Individuals, corporations, and governments are all part of a major transformation afforded by the Internet and the World Wide Web, characterized by ubiquitous access to all the information of human society.  Serious implications exist that have yet to be fully understood, or explored; notions of privacy, intellectual property, ownership, relationship, consumer, and producer are all being challenged and reinvented on the Web.  Corporations and governments both have a significant opportunity to take advantage of the Web to build better versions of their selves as they engage the power of the crowd; but they need to beware, because 20th century intentions and behaviors are transparent to the crowd.  Corporations that use the Web to engage customers, need to recognize that social networks are not simply another channel to reach additional customers, rather that use of social networks require ethical business models, because the crowd is vocal. Corporations can no longer exist in the space between the traditional business models of the 20th century and emergent business models, and are likely to experience significant business disruption by both competitors and consumers alike that take advantage of the new balance of power inherent on the Web.


Baym, N. K. (2010). Personal connections in the digital age. Cambridge, UK ; Malden, MA: Polity.

Christensen, C. M. (2000). The innovator’s dilemma : when new technologies cause great firms to fail (1st HarperBusiness ed.). New York: HarperBusiness.

Gilmore, J. (2011). John Gilmore’s Home Page  Retrieved September 3, 2011, from http://www.toad.com/gnu/

Hanly, F. (Writer). (2010). Programme 2: Enemy of the State? [Internet]. In R. Barnes (Producer), The Virtual Revolution. U.K.

Ingram, M. (2011, September 2, 2011). Is journalism as we know it becoming obsolete?  Retrieved September 4, 2011, 2011, from http://gigaom.com/2011/09/02/is-journalism-as-we-know-it-becoming-obsolete/

Pratto, F., Sidanius, J., & Levin, S. (2006). Social Dominance Theory and the Dynamics of Intergroup Relations: Taking Stock and Looking Forward. European Review of Social Psychology, 17, 271-320. doi: 10.1080/10463280601055772

Rock, R. (2011a, September 4, 2011). journey24pointoh. journey24pointoh  Retrieved September 4, 2011, 2011, from https://journey24pointoh.com/

Rock, R. (2011b, August 30, 2011). New Media, New Perspectives. journey24pointoh  Retrieved September 3, 2011, 2011, from https://journey24pointoh.com/2011/08/30/new-media-new-perspectives/

Rock, R. (2011c, August 30, 2011). Progressive Fail. progressivefail  Retrieved September 3, 2011, 2011, from http://www.progressivefail.org

Rock, R. (2011d, September 1, 2011). Social Dominance Theory: The U.S. Minority Experience. journey24pointoh  Retrieved September 3, 2011, 2011, from https://journey24pointoh.com/2011/09/04/social-dominance-theory-the-u-s-minority-experience/

Shirky, C. (Producer). (2009, July 23, 2011). How Social Media Can Make History. Talks. Retrieved from http://www.ted.com/talks/clay_shirky_how_cellphones_twitter_facebook_can_make_history.html

Sidanius, J., & Pratto, F. (1999). Social dominance : an intergroup theory of social hierarchy and oppression (Vol. x, 403 p.). Cambridge, UK ; New York: Cambridge University Press.

Smith, P. (Writer). (2010). Programme 1: The Great Leveling? [Internet]. In R. Barnes (Producer), The Virtual Revolution. U.K.

Wesch, M. (2010). From knowledeable to knowledge-able. Kansas City: TEDxKC.

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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