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Home Opinion The rise of the service economy
Services • Productivity • Transition

The rise of the service economy

Anne Wren - 08 May 2014

The transition to a post-Industrial economy will bring significant challenges for western societies.  Parties of the centre-left are best placed to ensure that these changes do not imply serious compromises in terms of equity

One of the fundamental socio-economic challenges facing the advanced democracies in the first decades of the new century remains that of structural adjustment to the decline of the industrial economy. In all countries (even an industrial powerhouse like Germany) the proportion of the working age population finding employment in traditional sectors (manufacturing and agriculture) has steadily declined – to less than fifteen percent by the turn of the century. The task for the left at this point is to develop politically and economically sustainable strategies for service sector employment expansion which do not imply serious compromises in terms of equity.

1.    Equality and employment expansion in low-productivity service sectors

Any strategy which relies too heavily on low productivity, and largely non-traded, service sectors (for example, personal and social services, health) without an accompanying expansion in more productive economic areas, is unlikely to be economically sustainable. And some strategies also have negative implications for equality. The private sector route to low-productivity service expansion, for example, (pursued most prominently in the US) has relied on an unequal distribution of earnings to keep down the prices of personal and consumer services, allowing a demand expansion to take place. This is only part of the story though: in recent decades the expansion of consumer and personal services in the US has also been driven increasingly by debt-fuelled consumer demand.
As is equally well-known, social democratic countries continued to achieve high levels of service employment expansion in this period (to varying degrees) without making the same levels of sacrifice in terms of equality, or incurring the same levels of private sector debt. But they have done so in part through the expansion of employment in public service sectors, financed by high levels of public taxation. In continental welfare states like Germany, meanwhile, high levels of wage equality and low levels of consumer demand, and limited public service provision, have combined to limit the availability of service sector employment opportunities compared with other countries, and hence also the number of citizens who are able to participate in the labour market.

2.    The need for expansion in high productivity service sectors

A focus on expansion in low-productivity service sectors then raises the prospect of a particularly unappealing set of political choices between outcomes such as employment creation, equality, taxation, and public and private sector indebtedness. Of equal importance, however, none of these strategies is, on its own, a sufficient long-term solution to the problem of de-industrialisation. Without a thriving set of high value added sectors to finance them, the expansive public service sectors of Scandinavia are ultimately unaffordable. Without the existence of a core group of well paid workers in high productivity export sectors, the large numbers of early retirees and women working within the home in Germany and other continental European countries cannot be supported.

The strategy of expanding employment in low productivity private services, meanwhile, relies not just on low relative wages and prices, but also on rising incomes, and, as the Liberal experience of the past decade has shown, an over-reliance on the expansion of credit and “wealth illusion” rather than productivity and income growth as a basis for the expansion of demand and employment in these sectors, is both unsustainable and economically costly. Any sustainable strategy for employment growth must depend instead on the expansion of output and employment in high productivity sectors and, in a context of de-industrialisation, this means that expansion in high productivity, traded, service sectors, like business services, communications, and finance, is, increasingly key. So what does this mean in terms of policy?

3.    High productivity service expansion requires college educated labour

One distinguishing feature of the group of high productivity, traded service sectors (“dynamic” service sectors) is that they are typically far more reliant on the new information and communications technologies (ICT) than other types of economic sectors. This has important implications for skills policy. There is strong empirical evidence that ICT and college educated labour are complements in production. ICT can substitute for a range of tasks which can be described by programmed instructions and which are typically carried out by workers with medium-level skills (secondary, or incomplete college education). As a result its diffusion tends to reduce the demand for labour at these skill levels. ICT is less effective, however, at performing non-routine cognitive tasks requiring more flexible problem solving skills and cannot substitute for managerial decision-making. Rather it serves to complement the skills of the (typically college educated) workers who perform those tasks. ICT diffusion therefore increases the demand for college level skills, and effective expansion in sectors which are ICT intensive requires that college level skills be adequately supplied.

4.    Public investment in education as early as the pre-primary level

A well-designed strategy for educational investment also has the potential to counteract the polarisation of labour market outcomes associated with the transition to services and the diffusion of ICT. However, the key is in the design. The private sector route to tertiary investment pursued in the US, the UK, and elsewhere in recent decades has had negative consequences in terms both of equity and efficiency. First, it is reliant on high levels of wage inequality to incentivise individual investment in (increasingly expensive) education. Second, it has resulted in a rather unequal distribution of skills and, given the increasing cost of tertiary education, there is a high risk that this distribution will be replicated across generations. Third, it has been associated with increasing levels of individual indebtedness. Finally, and critically, the evidence suggests that it has been ineffective as a strategy for ensuring an adequate supply of skills for ICT intensive labour markets, with further negative implications for equality as the demand for highly-skilled workers outstrips supply.

Public funding of education is therefore essential not only for the purposes of equity, but also to ensure an adequate supply of workers with the appropriate skills for a dynamic service economy. Crucially though, the focus of investment should not only be on the tertiary level itself. An increasingly strong body of empirical evidence points to the critical importance of investment in early childhood education to achievement at the tertiary level – especially for children from low-income families.

5.    Facilitate women’s participation in the labour market

The expansion of the service economy offers a significant opportunity to increase the participation of women in the labour market, since women have a comparative advantage in service provision (compared with industrial or agricultural production). Increasing womens’ access to labour market opportunities has obvious advantages in terms of equity: it is also essential to ensuring the sustainability of welfare state provision in the face of the burden of population ageing. Most countries could do much more to facilitate womens’ access to the labour market, however. Here again investment in early childhood education can play a role as part of a much needed broader strategy for public subsidisation of childcare for children and elders: the costs of caring are still overwhelmingly borne by women, forming a substantial obstacle to participation in paid employment. In tandem with these policies, more steps must be taken to facilitate the provision of meaningful and appropriately remunerated and protected part-time employment. In political terms, parties of the centre-left are well positioned to pursue this agenda: the demand for these types of policies amongst women in particular is well recognised, and is closely linked with their higher levels of support for the left.

Anne Wren is a research associate of the Institute for International Integration Studies at Trinity College, Dublin. The arguments in this article draw on the research of several authors, described in more detail in Anne Wren (Ed.) The Political Economy of the Service Transition.

Anne Wren will speak at the Policy Network/Renewal event The Rise of the Service Economy on 28 May.

This is a contribution to the “Making Progressive Politics Work” publication ‒ ideas and policy proposals from 40 leading international experts.

This is a contribution to Policy Network's work on Progressive Capitalism.

Tags: Anne Wren , Opinion , Progressive Governance Conference , Progressive Governance , Growth , Social stability , Living standards , Policy Network , Global Progress , Competitiveness , Growth , Solidarity , Globalisation , Centre-left , Centre-left , Europe , EU , European Union , Eurozone , Southern Europe , Northern Europe , Production , Productivity , Growth , Wages , Investment , Jobs , Globalisation , Equality , Pre-distribution

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