According to BLS, the dollar value of the United States’ manufacturing output has doubled since 1975 [Rugy].  The downside is that the number of manufacturing jobs has declined by 31% over that period.  Of course, our labor force has expanded from about 94 million people to about 158 million people over that same period.    Manufacturing accounted for about 24% of the jobs then, and about 10% now, and so-called “service jobs” have grown from 70% to 84%. [Lee] There is no question that ours is a service economy.

Having a service economy is, to me, a Good Thing.  For the most part, it means that we produce plenty of food and stuff, and we mostly want services.  We want to pay people to do the things we don’t want to do.  Don’t want to cut the lawn?  Hire a lawn care service.  Don’t want to clean the house?  Hire a cleaning service.  Don’t want to cook?  Order from a pizza delivery service.  Don’t want to do your taxes?  Hire a tax preparation service. Don’t want to pay your taxes?  Hire a campaign manager to get you elected — politicians don’t have to pay taxes.

The “service industry” is a more acceptable term for what Adam Smith called unproductive labor.  This was not a derogatory term, just a statement of fact.  When you buy a car, for instance, you can turn around and sell that car to someone else.  You may not get from him what you paid for the car, but you can get something.  Buy a haircut, and you come away with less money and less hair.  And no-one will want to buy your trimmings.  For all the work the barber put into cutting your hair, you come away happier, but he produced nothing.

So, referring to the title of Adam’s famous treatise, An Inquiry into the Nature and Causes of the Wealth of Nations, how is the wealth of the nation increased by the service industry?  Some people would simply say that it is not, because the service industry does not give us more stuff.  I disagree.

First, there is the problem of what is a service?  Let me give two simple examples.  I hand-load ammunition.  I do not make the brass, powder, primer, or bullets, but I do assemble them into ammunition.  Before I do that, those components sitting on my shelves are not ammunition.  Therefore, that is manufacturing work.  But what if I were a bartender?  The rum, ice, sugar, and strawberries are not a daiquiri, but my assembling them into a daiquiri would be classified a service.  So, if I make shots for your gun, I’m a manufacturer; and if I make shots for you, I’m a service provider.

Another example is an auto-repair shop.  That’s a service, right?  Theoretically, I could repair my own car.  I hate doing it though.  We always seem to exchange bodily fluids — oil and grease on my hands, sweat and blood on the car.  And if the transmission goes out, I’m outta luck.  So a car manufacturer (mostly just assembling parts made by suppliers) is a manufacturer, but keeping the car out of the junkyard, and thus obviating the need for a new car, is a service.  Does that service not increase the general level of wealth in the nation?

A contrary example is that of a teacher.  Teaching is a service industry.  Yet, when a person has received that education, he can turn around and sell that knowledge by teaching someone else.  Does that not increase the wealth of the nation?

Second, there is the fact that services make us happier.  Isn’t that the point of having stuff, too?  Isn’t that the point of having wealth? Sure, the dollar value of the service may depreciate to zero instantaneously, but the dollar value of stuff also depreciates — if not to zero, then darned close — just over a longer time-frame.  By making us happier, both stuff and services improve our quality of life.  And that is wealth.

So now, we are in a recession.  Oh, yeah, the recession ended two-and-a-half years ago, according to the economists.  But when you’re walking in the woods, and you go down into a valley, you don’t consider yourself out of the valley when you start up the other side.  Anyway, everyone talks about how to create jobs.  You can’t just create jobs by printing more money (“quantitative easing”) or by getting money from some people and giving it to others.  Companies are sitting on wads of cash and are reluctant to hire.  If you borrow money to give to the people, the people turn around and pay off their debts — generally to the same group from which the money was borrowed at the beginning of this sentence. Or they save it themselves.

Being a service economy, jobs will be mostly created when people start wanting services again.  This is in stark contrast to a manufacturing economy.  In a manufacturing economy coming out of a recession, a manufacturer flush with cash can hire workers at lower wages than before, and have them increase inventory in anticipation of future sales.  However, one cannot hire barbers to build up an inventory of haircuts.  Demand must drive a service economy, while supply can drive a manufacturing economy.  My daughter works in an up-scale Arlington restaurant.  The servers are paid mainly in tips, not by the owner.  The owner can hire waiters to stand around with few customers without doing significant damage to his bottom line.  I have no evidence to back up this hypothesis, but I suspect that such restaurants recover faster from recessions that do other service industries.

I also suspect that a service economy reacts more strongly to consumer sentiment than a manufacturing economy does.  Even if people think their jobs might be precarious, they might be willing to buy stuff because even if they get laid off they will still have the stuff.  But if they buy a services, they will have neither the services nor the money if they get laid off.  Coming out of a recession, people may focus on paying off debts accumulated when they were laid off, or perhaps on replacing the stuff that fell into disrepair, rather than in buying services.

Such are my musings on the Service Economy.  No point, really, just somewhere to start a discussion.