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   of the United States labor force, projected to rise above 80% by 2024.  There will be more employees in buxsiness services or health care, alone, than in all of the goods producing sector. 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.
See projections to 2024.

1.   Causes of growth

a.   income growth - climbing up Maslow's hierarchy of needs

b.   global competition and changing comparative advantage

c.   productivity growth differential—slow productivity growth in service sector requires larger share of labor, higher current prices

d.   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 almost every year, aside from downturn during the 2009-2010 Great Recession. Stable, 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. See Data.

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 found that the share of national income originating in "effectively" competitive industries increased significantly between 1958 and 1980.  More recent research by Abdel-Raouf suggests that the effectively competitive share of the U.S. economy continued to grow to through 1997, and monopolies fully disappeared. Since that time, however, Grullon, Larkin and Michaely find that the trend has reversed, and more than 75% of US industries have experienced an increase in concentration levels over the last two decades. They blame lax enforcement of antitrust regulations and increasing technological barriers to entry.


IV. The Labor Market—U.S. unemployment has been lower than European during most years since 1982. In 2016, the U.S. rate was 4.9% when the EU rate was 8.6%.  Why? Smaller wage increases, flexible labor market. Union membership declined from 27% in 1950s less than 12% in 2010. 
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 rlatively little effect on distribution, but transfer payments have a significant effect. 


          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.