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. 
Reflected in many of our institutions: local voting systems, college accreditation, movie rating systems, etc. Encourages experimentation, innovation, entrepreneurship. Discourages welfare spending. Made it difficult to impose health protocols that kept other countries safer during Covid. 

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 employment only from 1900-1930.

B.  The Service Sector - Employs about 80%  of the United States labor force, projected to rise to 81% by 2031.  Several subsectors of services (business services, health care, state/local government, leisure/hospitality, and retail trade) already employ more people than all of manufacturing. Now there are more people in business/professional services, alone, than in all of the goods producing sector (mining, construction, manufacturing, and agriculture), and by 2031 that will also be true of health care.
See projections to 2031.

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.  In the past, concern about concentration was focused on the railroads and manufacturing - now it has shifted to Amazon, Facebook, and other technology firms.

IV. The Labor Market—U.S. unemployment has been lower than European during most years since 1982. At the end of 2019, the U.S. rate was 3.5% when the EU rate was 6.3%.  Why? Smaller wage increases, flexible labor market. Union membership declined from 27% in 1950s to about 11% in 2020. Furthermore, union members accounted for about 35% of public-sector workers in 2020, but only 6.3% of private-sector workers. (Source)
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. U.S. equity markets are dominant in the world:

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

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

B.  Fiscal and Monetary Policy - Normally, the 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.

During the past couple of years, there's been a continuing debate over the sizes of the Covid relief bills that were passed by Congress and whether they were the cause of our higher rate of inflation (or  whether it's caused more by supply disruptions.  In the comparative data below, there's little correlation between Covid fiscal stimulus programs and acceleration of inflation. The relationship may be a bit stronger with reduction of unemployment.

C.  Distribution of Income - relatively unequal compared to other industrial nations.  Resistance to governmental redistribution. 

Two phases - 1940s-1970s, rising incomes of bottom 90%, and then decline. Since 1980s, rise of the top 1%. 

Source

          According to recent work by Blanchet, Chancel, and Gethin, the average income level in the U.S. (at PPP) is higher than in Western Europe, but average incomes of the bottom half of the income distribution are lower in the U.S. than in Western Europe.

That's true, despite the fact that the U.S. tax system seems to do more to level incomes than European taxes do:


Their conclusion is that Europe relies more on "predistribution" - investments in health care and education, effective antitrust laws and labor-market regulations, and relatively strong labor unions - and the U.S. relies more on "redistribution" - progressive taxes (which have grown less progressive) and transfer payments.