The United States: The Service Economy

I.    The Environment

A.  Large size and rich natural resources--7% of world land area for 5% of world's population.  Gavin Wright—resource abundance made major contribution to industrialization between 1890 and 1940.

B.  "Melting Pot" Culture -- Benefit: Complementary skills.  Cost: Discrimination and rivalry.  

C.  Philosophy of Individualism -- belief that individuals can have significant impact on society; success through individual hard work and frugality.  Encourages higher education; discourages vocational education and welfare spending. 

II.   The Changing Structure of the Economy

A.  Agriculture most important employment sector until 20th century.  Large agricultural exporter during the French Revolution and Napoleonic wars.  Industry dominated only from 1900-1930.

B.  The Service Sector - Employs ¾  of the United States labor force.  Expansion moved from wholesale and retail trade to public services, and finally the non-profit services, education and health, accounting, finance, insurance, and computer programming.
For projections to 2014, see Table 1

1.   Causes of growth

a.   income elasticities—demand side

b.   deindustrialization—competition

c.   cost disease—slow productivity growth requires larger share of labor, higher current prices

d.   economies of scale—growth needed for efficiency

e.   labor supply—women’s preferences

2.   Significance - 

a.   Productivity - Growth is relatively slow in services, so rising service share has caused overall slowdown and higher inflation (illusion?). 

b.   Stability - Has increased the stability of output and employment.  Service employment has risen every year since 1958. Nearly immune to recessions, perhaps because:

i.    higher percentage of self-employed workers.

ii.   flexible incomes (piece work or commission).

iii.  no inventories.

iv.  government services stable.

c.   Positive contribution to balance of payments.

d.   Labor and income distribution - Many people are self employed and few are unionized.  Service sector growth apparently contributes to income inequality.

III. Industrial Organization -- At the end of the Civil War, the age of big business began.  Today, concentration in U.S. is comparable to levels in France, W. Germany, Italy, Japan and the U.K.  Shepherd claims that the share of national income originating from "effectively" competitive industries rose from 56 percent in 1958 to 77 percent in 1980.  Tradition of regulation, rather than nationalization, of monopolies.

IV. The Labor Market—U.S. unemployment lower than European since 1982.  Why? Smaller wage increases, flexible labor market. Union membership declined from 27% in 1950s about 15% now. 
A.  Why decline of unionization?

1.   Service sector, self employment.

2.   Job satisfaction.

3.   Employer resistance.

4.   Government substitution. 

B.  Have unions increased wages at expense of profits or at the expense of nonunion wages?

V.  The Financial Sector -- Well-developed financial markets. Dual banking system with gradual strengthening of central bank (Federal Reserve created in 1913; gained control of reserve requirements for all federally insured depository institutions in 1980.

VI. The Governmental Sector -- Federal division of labor. Relatively non-interventionist.

A.  Regulation - How much safety do we want? Banks?

B.  Fiscal and Monetary Policy - National budget is prepared and proposed by the executive branch; examined, amended, and approved by the Congress; and signed into law by the President.  Monetary policy is set by the Federal Reserve, insulated from political pressure.  No formal use of indicative planning or industrial policy.

C.  Distribution of Income - relatively unequal compared to other industrial nations.  Resistance to governmental redistribution.  The taxation system has little effect on distribution, but transfer payments have a significant effect. 

      UPDATE: In 2003, taxes and the earned income credit reduced the Gini index by only 4.6%, but transfer payments reduced it by 17%.  (U.S. Census Bureau estimates)

          The distribution of total income has been fairly stable since 1950.  Progressive effect of growing transfer payments may have been offset by regressive growth of service sector.