The Pitfalls of the “Service Economy”

In working on the CAW’s recent submission to the Red Wilson panel, I did a bit of work to debunk the common argument that the growth of the “services economy” can somehow offset the damage that is occurring these days to our manufacturing sector and other tradeable industries.

Here is the link to our full submission (which is introduced in another blog entry):

http://www.caw.ca/en/a-productive-economy-submission-to-competition-policy-review-panel.htm

The stuff on services is near the end of the report; see especially Table 1 at the end.

I did confirm that the major structural shift occurring in the economy is NOT, surprisingly, from manufacturing into resources.  It is true that resources are accounting for a growing share of our total exports.  But the real supply response of resources production to the incredible surge in resource prices (and profits!) has been surprisingly muted.  Most of the gains from the global commodity boom are being captured in rents on existing production, not in the form of expanding output.  The oil sands developments in Alberta are obviously huge and epochal.  But they are still not big enough to single-handedly shift the composition of our entire national output.

What IS happening is a relative shift in production and employment into services production, especially private services.  This is interesting and potentially damaging for a number of reasons, including the poor quality of jobs, and the non-traded nature of most services production.  Non-traded sectors tend to demonstrate lower levels of productivity and incomes than traded sectors (although this is not inevitable: it all depends on how carefully we regulate, or don’t regulate, the quality of services work).

Indeed, I was surprised to find that services production as a whole is becoming LESS tradeable over time, not MORE.  This is contrary to the standard claim that technology is making services output more tradeable (call centres, etc.).  The fastest-growing services sectors are those standard job ghettoes (retail, hospitality, etc.) that are fundamentally non-traded.  The rapid expansion of services production, on net balance, is therefore causing a DISENGAGEMENT of Canada’s GDP from export and import markets.  That is interesting and surprising.  The proportion of total services production that is exported is tiny (under 2%), and what’s more it’s FALLING.

It is well-known that services jobs on average are poorer quality than jobs in the rest of the labour market.  Average services wages and salaries are about 15% lower than in the goods-producing side of the economy (and 7% lower than the weighted average for the whole economy).  But again contrary to claims about the potential for high-wage service jobs, the average relative quality of services employment is actually deteriorating.

Table 1 of the CAW brief divides all services employment into 3 broad categories: high-wage private services jobs (which pay, on average, 20% more than the Canadian average wage), low-wage private services jobs (which pay, on average, 35% less than the Canadian average wage), and public services jobs (which pay slightly more, about 5%, than the Canadian average wage).

Since 2002 (which is when my analysis suggests that Canada’s deindustrialization began in earnest), high-wage private services employment has grown 5%.  But low-wage private services employment has grown twice as fast (over 10%).  Public services employment has grown by a quite decent 9%.

On the whole, then, lousy services jobs are being created much faster than better services jobs, and the overall quality of that work is deteriorating.  A similar story could be told regarding th eproductivity of services work.  (At the same time, of course, wages across the labour market are picking up nicely thanks to low unemployment, so average service-sector earnings, even in the lousy-job sub-sectors, are improving.)

The mere mathematical reality of productivity growth (which has always been faster in goods industries than services industries), combined with the high income eleasticity of demand for man services, suggests that services will continue to expand as a share of total GDP and employment.  However, we have a choice as a society over what kind of services jobs we will have.  By leaving it up “to the market,” the evidence is clear that those jobs will get worse over time.