How Important Is the “Service Sector Effect” on Productivity?
In the cost-driven U.S. service economy, are worker benefits being sacrificed in the name of lower-cost services to customers? Are these social costs more than offset by the benefits of job creation, the consumption stimulus that spurs job creation, and lower unemployment?
Do increases in social sector productivity, which seem to prevail at least in the U.S., benefit consumers at the expense of workers? Or is the scale weighted in favor of the latter who may benefit two ways, in terms of both an income stream from increased employment and lower costs? Respondents to this month's column appeared to be about equally divided on these issues.
John Inman commented, "I sometimes feel that we are racing to the bottom to provide products and services at ever lower pricing without considering the true costs. . . . We need to start to question our motives, our paradigms, and what we are willing to accept and ignore to get what we think that we need." C. J. Cullinane was concerned that "This trend (service sector relative growth) will indeed catch up with the United States in the form of fewer medical and retirement benefits as well as lower paying jobs . . . one look at the American auto industry gives us a glimpse into the future economy." As Daniel Hayes put it: "I see a shakeout coming among low-cost service providers unless they find ways to provide value to both customers and employees. There's no reason that both sides can't win, with better service and more satisfied employees."
On the other hand, E. Hassen cautioned, that "Before criticizing, we should examine carefully the social sector effects of wage deflation and higher productivity. In all ecologies things are not simple." Kamal Gupta commented, "There is no way to grow other than [to] keep on increasing productivity."
Hoshang Jhaveri sought to explain why the growth in service sector productivity has been so remarkable: "Workers in the service sector are better exposed to their customers than the ones in classic manufacturing. . . . To that extent service sector workers are persuaded, by their own concern for self-respect and appreciation, to perform optimally."
Several trends are clear. As economies develop, they generate proportionately more jobs in services than in manufacturing, farming, or other extractive industries. In the U.S., for example, fewer than 20 percent of all jobs are in non-services. Other developed economies are approaching this. This raises several questions. For example, just what is the optimal amount of service sector activity in an economy that meets consumer needs while contributing optimally to overall economic health? Has the U.S. gone too far? What obligations does this create for increasing service sector productivity? Do manufacturing-based economies have some kind of inherent advantage over service-based economies? If so, just what is it? Or does an increasing emphasis on services naturally accompany the growth of a knowledge society, representing an insurance policy for the continuance of innovation and progress necessary to maintain world economic leadership? What do you think?
One can make the argument that a small group of organizations like the Vanguard Group, Southwest Airlines, and Wal-Mart (in the U.S.) have had a profound impact on the way we live and work. They share several things in common: (1) a penchant for driving down costs in their respective industries, (2) a focus on serving customers, and (3) policies and competencies that have literally changed the rules of the game for their respective industries worldwide.
In spite of recent adverse publicity regarding Wal-Mart's personnel practices, all of these organizations have made their places of work so attractive that their employees may work harder over longer hours than they otherwise might. Whether this leads to a higher standard of living than that of their European counterparts is debatable. But there is growing evidence that providing pleasant work environments, aided to some degree by new technology, has spearheaded the continued high rate of improvement in productivity in the U.S. in recent years. In fact, a recent report by the McKinsey Global Institute has found that five of the top seven industries that have led productivity growth in the period of 2000 to 2003 are service industries like retailing and financial services.
Increasing productivity in the service sector has been accompanied by increasing employment, a phenomenon somewhat at odds with experience in the glory days of manufacturing. Thanks in part to new technology, service sector workers work smarter. But they are working just as many hours as before. Perhaps lower-paying jobs force people to work more hours to sustain a certain lifestyle. But it may also be that more customers (including workers who need more services if they are to maintain their "work style") want and are able to afford the services these workers deliver. Whatever it is, Americans continue to work long hours at a time when people in some other countries increasingly stand by watching them do it.
James Surowiecki, in a piece last year in The New Yorker, argued that the more that Americans work, the more they spend. And the more they spend, the more jobs they create. This perhaps explains the painful difference in unemployment rates in Europe and the U.S., providing at least one explanation for the recent riots in France.
According to Daniel Gross, one of the important factors contributing to the development of cost-driven, productive service firms in the U.S. is thought to be a system of laws and regulations that provide more latitude to large organizations in their dealings with employees, customers, suppliers, and competitors. In recent years, questions have been raised about whether those laws and regulations should be tightened to prevent certain practices, particularly concerning the accounting and payment for work and failure to provide healthcare. All of this raises a number of questions.
In the cost-driven U.S. service economy, are benefits to workers being sacrificed in the name of lower-cost services to customers? Is there a significant cost in terms of quality of life or social costs that have to be shared by everyone? Or are the social costs more than offset by the beneficial creation of jobs, the stimulation of consumption that leads to more job creation, and lower unemployment? Should we believe, praise, or criticize the social sector effect? How important is it? What do you think?