We aren't "a service economy"
The Role of Services in the Modern U.S. Economy
Office of Service Industries
Douglas B. Cleveland,
January 1999
Throughout the latter half of the twentieth century, the service sectorhas been both the largest and the fastest growing component of the U.S.economy. Fifty years ago, the service sector accounted for about sixtypercent of U.S. output and employment. Today, the service sector's share of the U.S. economy has risen to roughly 80 percent.The remarkable economic prominence of services is no less impressivewhen the sector's various components are considered one by one:-- Wholesale trade, retail trade, and transportation & public utilitieseach contribute over half a trillion dollars to annual U.S. output.-- Construction, the smallest subsector, now accounts for a highershare of economic output than either agriculture or mining(construction is counted among the subsectors here because it isviewed as a service in the context of international trade).-- And each of the two largest subsectors -- finance, insurance, & realestate, and Services, the catchall category covering all other privateservices -- contributed over one and a half trillion dollars to GDP in1997, i.e., more than the 1.4 trillion dollars in output produced bythe manufacturing sector of the economy.Aside from sheer size, the most crucial aspect of the service sector'sascendance is the thorough integration of services with virtually everyother aspect of the present-day American economy. From Main Street toWall Street, wherever business is conducted in the United States,services businesses are an essential component of the local economy -- a critical source of new local jobs, an essential ingredient in creating acommercial environment conducive to entrepreneurship, and a vital linkto the wider U.S. and world economies.
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The Role of Services in the Modern U.S. EconomyJanuary 1999At one end of the spectrum, small companies serve and prosper withincommunities both large and small all across America. By the mid-90s, nine of every ten firms with fewer than twenty employees were in theservices sector, and these small services companies accounted for nine of every ten jobs at small firms -- nationwide, over 17 million jobs, or,on average, about 350 thousand jobs in each of the fifty states.The relative importance of small services providers is most apparentwhen contrasted with the U.S. manufacturing sector. There, the 242thousand firms with under twenty employees accounted for three out ofevery four manufacturing firms, but for only one of every fourteenmanufacturing jobs -- for a nationwide total of about 1.3 million jobs, or,on average, about 27 thousand jobs in each of the fifty states.While the importance of small services firms can hardly be overstated,it is no more than a part of the story of the modern services economy.For example, eight of the thirty firms that now make up the Dow Jonesindex of blue-chip stocks are in the service sector: American Express,which in 1982 became the first services firm to be added to the Dow, AT&T, Citigroup, Disney, McDonald's, JP Morgan, Sears, and Wal-Mart.Other firms on the Dow that began as, and that are commonly viewedas, manufacturing firms -- GE and IBM are prime examples -- also rankamong the world's largest and most competitive services operations. And, of course, by design, not one of the firms listed among the Dowindustrials is a transportation or a utilities concern: each of these keysubsectors of the service economy is covered by its own market index.Together, then, services firms large and small now provide more jobs-- and more new jobs -- than all other sectors of the economy combined. Service sector payrolls rose 65 percent over just the past twenty years,with almost 40 million more employees today than there were in 1978. Moreover, these new service sector jobs accounted for the entire net gainin nonfarm employment since the 1970s, a trend that is forecast tocontinue into the next decade. The result: 85 percent of all nonfarmworkers hold jobs in the service sector. Even if the nation's 3 million
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The Role of Services in the Modern U.S. EconomyJanuary 1999federal and 17 million state and local government employees areexcluded, there were 87 million private sector jobs in the service sectorin 1998, accounting for 82 percent of all private nonfarm employment.A variety of forces underlie this inexorable economic shift to services. A century ago, structural economic shifts were viewed as the natural andinevitable result of rising per capita incomes, with the consumption ofmanufactured goods first eclipsing that of agricultural items, and withpurchases of goods in turn eclipsed by the purchase of various services.Today, at the close of a century that history will almost certainly recordas the dawn of the information age, it is clear that important new forceshave also been driving the shift to a more services-oriented economy. The rapid development and widespread deployment of powerful newinformation technologies is one such force for economic transformation. For example, when a recent study ranked U.S. industries according to theratio of investment in information technology relative to total capitalinvestment, the ten top-ranked industries were all services industries. Information is the fuel that keeps the services economy running.Less widely recognized, but no less important, the reverse is also true:modern services industries are critical drivers of technical progress.Because they rely disproportionately on and invest disproportionately inadvanced information technologies, services firms bring full circle the linkbetween the economy's services-intensity and its information-intensity,creating a huge, growing market for the most advanced informationtechnologies that the economy's goods-producing industries can deliver.Looking ahead, it may well be this mutually reinforcing cycle of technicaland commercial advances in the goods- and services-producing sectors that proves ultimately to be the truest gauge of the indispensable role ofa modern service sector in the information economy of the next century.And, if the recent past is any guide, the service sector's role in that newinformation economy will match its unrivaled importance as measuredtoday in terms of output and employment. |
