SERVICE INDUSTRIES



Definitions of which activities constitute the service sector vary somewhat, but by all definitions services are a massive and growing segment of the U.S. economy. One of the broadest definitions of service industries includes all areas of the economy except goods-producing industries (manufacturing, construction, agriculture, and mining) and government. By this definition, services in 1997 made up nearly two-thirds of total U.S. gross domestic product (GDP). When defined more narrowly to exclude areas such as retail and wholesale trade, communications and transportation, finance and real estate, and utilities, the "pure" services sector still accounted for approximately 22 percent of private-sector GDP and, at more than 34 million workers, employed twice as many people as all of U.S. manufacturing. Similar patterns have been observed in other leading industrial economies.

All of these figures are testimony to the rising importance of service industries in an era of so-called post-industrial economies. The trend is not particularly new. Indeed, it has characterized the U.S. economy since at least the post-World War II period. Shortly after the war, services broadly defined represented slightly less than 50 percent of U.S. GDP. By the 1980s, the proportion was in the 60 percent range.

The employment transition has been more dramatic. The narrowly defined service sector (Standard Industrial Classification codes 7011-8999) provided only 5.4 million U.S. jobs in 1950, compared to 15.2 million in manufacturing. By 1970, service employment had more than doubled to 11.5 million, while manufacturing had edged up only to 19.3 million. Services nearly doubled again by 1985, reaching 22 million workers, whereas manufacturing had stalled at 19.2 million, after having peaked briefly in the late 1970s at 21 million. Since the mid-1980s the manufacturing workforce has hovered around 17-19 million, while services continued to climb toward the 40 million mark, crossing 35 million by the late 1990s.

CONCERNS OVER EMPLOYMENT
QUALITY

A perennial concern about the growth of service industries is that they tend to create lower-paying, lower-skilled jobs than those in manufacturing. There is some evidence to support this, particularly when the largest growth occupations in the service sector are considered. According to U.S. Bureau of Labor Statistics projections, some of the service occupations expected to offer the most new jobs in the late 1990s and early 2000s were retail clerks and cashiers, home health care workers, teachers' aides, and truck drivers. All of these positions require minimal training, experience high turnover, and generally don't pay very well. However, on the same list of high-growth occupations are registered nurses, systems analysts, teachers, database administrators, and sales supervisors, all of which are considered good jobs requiring moderate skill.

The forecasts envision that the most jobs will be created in relatively low paying jobs, yet some of the fastest growth (and not an insignificant number of jobs) will be in high-skilled, high-paying jobs. An early 1990s study concluded that the median service wage was only slightly less than the median goods producing wage, a difference of between 3 percent and 4 percent. Hence, while there is some substance to the claim that the so-called service economy produces less desirable jobs, the claim may be overstated in some cases.

LARGEST SERVICE SEGMENTS

The service sector comprises a very diverse set of activities. Under the North American Industry Classification System (NAICS), a relatively new and service-oriented nomenclature for describing economic activities, 14 of the 20 broad sectors can be considered services:

  1. Utilities
  2. Wholesale Trade
  3. Retail Trade
  4. Transportation and Warehousing
  5. Information
  6. Finance and Insurance
  7. Real Estate and Rental and Leasing
  8. Professional, Scientific, and Technical Services
  9. Administrative and Support and Waste Management and Remediation
  10. Educational Services
  11. Health Care and Social Assistance
  12. Arts, Entertainment, and Recreation
  13. Accommodation and Foodservices
  14. Other Services

The last seven categories on this list, sometimes along with information, are typically defined as the narrower service industry sector. Among these eight, health services are by far the largest category in terms of annual receipts, which in 1997 totaled an estimated $890 billion, based on advance figures from the Census Bureau's 1997 Economic Census. Information was second largest that year, with $642 in revenues, followed by professional and technical services ($609 billion), administrative and waste management services ($303 billion), and general private-sector "other" services ($270 billion). Food and accommodation services (primarily restaurants and hotels) also had sales in the upper range—probably falling in between professional/technical and administrative services—but the 1997 census data were not yet available at the time of publication.

TRADE IN SERVICES

Services have not only been a significant portion of the domestic economy, but they are also a major area of U.S. foreign trade. As of 1998, services accounted for approximately 28 percent all U.S. exports by value and 16 percent of imports by value. In total, service exports were worth $264 billion in 1998, while imports registered at $ 181 billion. Thus, unlike in merchandise trade, the United States has maintained a healthy trade surplus in services, worth nearly $83 billion in 1998. Some of the largest service export areas are travel and tourism (when foreign visitors spend money in the United States their travel is considered an export, and when U.S. residents spend money abroad it is recorded as an import), professional and technical services, and royalties from intellectual property rights licensed abroad (e.g., software, musical recordings, films).

ECONOMIC THEORIES ON THE RISE OF
SERVICES

A variety of theories exist to explain service industry dominance. Michael V. Maciosek provided a helpful overview of the competing ideas in his 1995 paper "Behind the Growth of Service Industries," published in the Illinois Business Review. The conventional explanation centers around three notions. First, the rising efficiency of manufacturing means that it takes fewer workers and less capital to produce the equivalent amount of goods as before. Second, countries with lower labor costs can produce manufactured goods more cheaply than the United States, so U.S. imports rise and domestic production doesn't rise as quickly or may even decline. And third, some believe that as a society becomes more affluent and urban, an increasing share of income is spent on services rather than on goods. In the case of affluence this increase is fueled by convenience or indulgence, and in the case of urbanization it is brought about by specialization of labor, working outside the home, and related lifestyle changes. On the surface, there is some statistical evidence to support each of these claims.

However, an alternative perspective is that the service industry growth has been in large part a statistical construct that belies underlying trends. One argument for this viewpoint is that the appearance of service industry growth was caused by the separation and specialization of tasks previously performed all within one company, such as accounting or maintenance. In this sense, at least part of the service growth has merely been a reclassification of activities that once fell under manufacturing.

Another alleged distortion of service industry growth can be traced to productivity and pricing. Services, the theory goes, have not witnessed the high rate of productivity growth over the last several decades that manufacturing has. As a result, Maciosek reported, price inflation for services has been much greater than that for goods, and when industry specific inflation is factored in, the growth of services in relation to manufacturing all but vanishes.

Clearly, no single theory explains the service phenomenon entirely, and the various proposals are not mutually exclusive.

FURTHER READING:

Chmura, Christine. "Are Service Jobs Creating a Second-Rate Economy?" ABA Banking Journal, November 1996.

Daniels, P.W. Service Industries in the World Economy. Cambridge, MA: Blackwell, 1993.

Herzenberg, Stephen, John A. Alic, and Howard Wial. New Rules for a New Economy: Employment and Opportunity in Postindustrial America. Ithaca, NY: Cornell University Press, 1998.

Illeris, Sven. The Service Economy: A Geographical Approach. New York: John Wiley & Sons, 1996.

Maciosek, Michael V. "Behind the Growth of Services." Illinois Business Review, fall 1995.

U.S. Bureau of Labor Statistics. "Occupations with the Largest Job Growth, 1996-2006." Employment Projections. Washington, 1997. Available from www.bls.gov .

U.S. Census Bureau. "Advance Summary Statistics for the United States." 1997 Economic Census. Washington, March 1999. Available from www.census.gov .



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