If you think the much-chronicled rise of the service sector signals lower wages, fewer exports, and an economy that can't grow, think again
Asked what you think are the largest exports out of New Haven, New York City, Seattle, or the United States, it would surprise no one if your guesses were textiles, computers, garments, airplanes, or food. But these guesses, of course, would be wrong. Three of the largest exporters out of New Haven are Yale University, Yale New Haven Medical Center Inc., and the Knights of Columbus (the Knights is one of the largest private life-insurance providers in the world, insuring its own members). New York City's largest export is legal services. Seattle now exports more services than goods, despite the Boeing Co.'s presence there. And the United States as a whole is now a large net services exporter, while importing far more goods than it sells abroad.
This, we've long been led to believe, isn't the way the economy is supposed to work. We're supposed to make and grow things, and then sell them abroad. The people and companies that make and grow things are supposed to be our "basic industries." The supposed role of service companies is to help industry get the job done -- by providing services either to workers (groceries, television repairs, health clubs) or to their companies (ad brochures, accounting help, janitorial work), so they can make the things that make our economy strong. According to the conventional wisdom, we don't export services. Services are consumed locally by the goods makers, who do export. And, naturally, service jobs pay worse because they are less fundamental to our economy.
Such, anyway, is the stereotype: service sector as collective support system, dependent for its health on the health of the basic industries it assists. The stereotype suggests that service businesses don't pay, don't grow, and don't create anything that can be sold overseas. The facts, however, suggest otherwise.
Through the early 1970s, the stereotype wasn't a bad one. Then several things happened at once to begin producing change. First, the economy became increasingly international. As a nation, our imports have tripled as a percentage of gross national product (from 4% to 13%). We now trade only 2% less of our GNP than does Japan. Second, other parts of the world grew very skilled at making the goods that we consume -- televisions, baseball gloves, clothing, machine tools . . . and just about everything else.
Third, the technology that made this trade escalation possible -- jet air travel, satellites, computers -- has opened up a huge array of opportunities related to knowing more, and to finding it out more quickly. This technology has accelerated the growth of a whole new crop of industries and companies in the United States -- companies that offer computer software, data bases, air transport, credit cards, financial-planning advice, artificial intelligence, hospital management, rapid parcel delivery, reservations networks, international hotel chains, education, health care, consulting, and publications such as INC. In some cases, the explosion has been extraordinary. Massachusetts now boasts a computer-software industry that is larger than its legal profession or its publishing industry. More than 40% of all software company employment in Massachusetts today is in companies that did not exist in 1980.
The United States appears to have gotten the jump on creating and growing companies that produce and export the kinds of services just described. Nationally, there has been a clear shift of employment away from the task of making things and into that of providing services (see figure 1). Though we've added 36 million jobs to the U.S. economy since 1966, we now employ fewer people in manufacturing than we did then. Equally clear is the fact that, since about 1975, we have done well selling our services abroad despite a comparable lack of success moving our goods (see figure 2). And the upward trend in service exports, most experts agree, is actually much greater than the statistics demonstrate because service exports are significantly undercounted. "Some of the things that are the fastest growing and sexiest, like telecommunications and computer-related services, don't show up in the balance of payments," says David McMeans of the Commerce Department. "There's not much [recorded] in terms of management consulting, either."
In 1980, a U.S. government study tracked down $60 billion worth of service business exports -- among them $13.9 billion in transportation, $5.4 billion in construction and engineering, $2.1 billion in advertising, and $1.1 billion in movies. The list, which is long, demonstrates our export success with all kinds of services: our airlines that span the world, our entertainers who have reached into so many countries with their music and films, our hotel chains, our insurance companies, our franchisors (McDonald's thrives abroad), and our analytical brainpower -- which helps others to design and build roads, buildings, bridges, dams, and so forth.
It is important to note, however, that the growth of the service sector isn't uniform. Certain kinds of businesses are responsible for most of the expansion. To see how the growth is happening, it's useful to differentiate between those businesses that serve primarily local customers (such as retailers and repairmen) and those that can and do serve other businesses here and abroad (such as consulting, legal, and data-processing firms). We've divided services into six categories: distribution; retailing and consumer; business and professional; investor; entertainment; and health and educational.
It is interesting to note that the kinds of services that conjure up the stereotypical service image -- mom-and-pop grocery stores, taxicabs, garages, banks -- are actually stable or declining in relative terms (figure 3), while the sector's growth is taking place in business and professional, health, educational, and entertainment services. Not only are these the services we can export to others, they're the ones that, in many cases, pay reasonably well and are fair substitutes for the manufacturing jobs they replace. Doctors, computer programmers, consultants, and most entertainers are paid well, and they offset some of the low-paying jobs in health and education. Massachusetts, which has gone through the manufacturing-to-service transformation more completely than most states, has raised its per capita income over the past 10 years from 6% to 16% above the national average.
What's clear is that while there is a portion of the service sector that remains much as we used to describe it -- undynamic and primarily supporting in function -- another portion has made of services a whole new kind of basic industry. These are service businesses that consume goods and that export their offerings with huge success. They aren't subservient to manufacturing. They don't only serve the locals, and they don't simply "take in each other's wash." They use brains and modern technology to assist companies and help people live their lives in a more satisfactory manner, just as do our makers of goods.
Our new service industry is competitive in world markets, much of it pays very well, and it offers enormous entrepreneurial opportunity. We are not somehow weaker as a nation because we now rely more on our brains than our factories to create wealth. We are stronger. Our brainpower is extraordinary relative to our size; our factories, increasingly, are ordinary. We must go where our advantage lies and learn to understand and exploit the segment of our economy that has long been misunderstood and undervalued. It's time the service industry got some respect.