Monday, June 1, 2009

Service vs. Manufacturing

In last week's post Can We Inflate Our Way out of the Mess?, I asserted that employees currently have no bargaining power, thus wages are unlikely to increase. In response, reader kerrjac commented:

It's hard to discuss absolute job gains & losses without looking at which sectors are driving the numbers. The overall trend is that manufacturing jobs are decreasing while service/technology jobs are increasing. This trend has been observed for well over a decade, so it's no surprise that an economic meltdown would help catalyze this shift.
The rest of kerrjac's post was related to the benefits that may occur when the U.S. becomes more service based. What I feel kerrjac doesn't understand (and is likely common amongst many a reader) is that this shift began a LOT longer than a decade ago. In fact, the U.S. economy began to shift away from goods producing industries more than 70 years ago. The U.S. economy is now made up of roughly 6x more service providing than goods producing workers. Thus, there is no shift to come... we are already a service based economy.

This shift has helped the U.S. economy become much more stable as service providing jobs are inherently much more stable than goods producing jobs (whether a company producers 10 or 1000 items, as long as it remains in business most of these service jobs are required).

Yes, jobs that are goods producing have been impacted more negatively during the recent downturn, but many service based jobs are highly dependent on the survival of these manufacturing industries / companies. The broader concern I have already detailed in my post The End of the Private Sector Boom is that service based or not, our economy may have hit the proverbial wall. Over the past ten years, the number of service related jobs have increased less than 1% per year, the lowest such level going all the way back to WWII (the furthest I was able to get data) and is poised to only get worse from here (and this doesn't take into account the fact that the U.S. population is getting older and is growing at ~1% per year).

Source: BLS


  1. "service providing jobs are inherently much more stable than goods producing jobs..."


    Computing power and the Internet, in all their awesomeness, will eliminate service jobs by the millions. It is like dynamite, both a jobs creator and a jobs destroyer.

  2. And then the robots will take over the world!

  3. Thanks for the reply, Jake.

    Greenspan's recent autobiography offers really good insight into the notion of a modern service-based economy. Yes we have been shifting towards it for a long time, but accelerated progress has brought some surprising changes.

    During the 90's, Greenspan was absolutely baffled by discrepancies between overall economic growth & public anxiety about the economy - both were increasing steadily. At the same time, employee turnover was quite high, but the time it took to find a new job was low.

    The tradeoff he viewed was between economic prosperity (in a service-based economy) & high employee turnover/zig zagging career paths. In this sense service jobs are much less stable than manufacturing ones, but at the same time they boost general demand for supplementary public & private services pop up to help ease the turmoil. In another sense, it's the same as it's always been, just sped up.

    Like the early growth in service-based jobs you point out, we can probably see glimpses of this public economic anxiety decades ago; but undoubtedly it has taken a new categorically different form in the past 10-20 years. And I would be very surprised if the current depression didn't catapult us forward into a more all-out service-based economy. The great depression arguably had the same effect in pushing us away from agriculture & towards manufacturing, which analagous to services in the modern economy, did quite well before the crash.

    We'll always be dependent on manufactured goods - overseas (more likely) or not - but the same applies to foreign agriculture & goods. The more that overseas manufacturing develops the better so that market forces will be able to correct for catastrophic events & other anomalies. As for what we'll actually do, well I'm sure we'll think of plenty ontop of our current services/technology. Even though a service-based economy is rockier in many aspects, demand for its output is just as tangible & real as demand for anything else in the world.