Practice News

Rise of services in modern economies does not herald mass unemployment

Last week’s slew of data on the state of the economy contained many nuggets. Among them was the sheer scale of Ireland’s services exports, the value of which last year exceeded the value of manufactured goods exports for the first time.

In this regard Ireland is unique. While most countries have seen their services exports increase, reflecting the rise and rise of services provision in economic activity, in no other sizeable economy are they in excess of 50pc of GDP, as is the case in Ireland.

It is impossible to say how much further this trend will go, but the possibilities appear endless given that the rise to dominance of services is a very long-term trend.

While this trend has spared many of us from the back-breaking work our forefathers did on farms and in factories, there are growing concerns about it. If services jobs disappear, just as jobs in agriculture and manufacturing in the past, what will replace them?

When labour saving devices emerged in agriculture, people moved to the cities to work in factories. When industry became more automated, people moved to services. But with computers becoming capable of doing ever more skilled jobs, fears are being raised that there will be nothing to replace services jobs if they start to disappear.

But those who have predicted the end of work in the past — from Luddites who blamed technology to protectionists who blamed free trade – have all been wrong. The new generation of job doom-mongers are likely to be wrong this time too.

To see why permanent mass unemployment is very unlikely, consider the very long-term trends in how economies are structured.

For most of human history man devoted most of his time to feeding himself – first by hunting and gathering, and then by agriculture. In economic terms, food production accounted for almost all output.

But, as food production became more sophisticated, making things – including agricultural machinery, clothing and materials for housing – became more important than growing things and rearing livestock. And, as the process of making things became more complex, more people were needed to support it – scribes, administrators, book keepers, supervisors and managers.

As this process, in turn, caused societies to become more complex and allowed them to urbanise, the need to oversee it all increased. Those overseers are what we know today as bureaucrats – one of the earliest kinds of services sector occupation.

As economies progress further and even more wealth is created, the demand for an ever greater range of services means that both agriculture and industry come to be dwarfed in economic output by the provision of services.

And while very big differences still exist between the richest and poorest countries, today services dominate almost everywhere and only in a small number of the most under-developed countries in the world does agriculture account for half of wealth creation.

The first chart illustrates the direction of the universal trend in services growth which sees it outstripping other sectors for as long as figures have been collated. It shows a number of countries of different levels of development and different parts of the world.

France and the US were among the first countries to industrialise, and despite many differences they actually have much more in common with each other.

The gradual rise in the dominance of services in their economies has been almost identical. Now just shy of four-fifths of the wealth created annually in both economies is accounted for by services activity.

Ireland, which does not have a long history of data provision, hence the shorter period of time covered in the graph, has a smaller services sector than either France or the US.

Although Ireland’s agriculture sector is bigger than the average for a developed economy, the difference is mostly because of the presence of multinationals (or more particularly pharmaceutical companies) which generate a great deal of their manufactured output here.

China remains a poor country on a per capita basis but has grown rapidly since abandoning communism. Despite its huge manufacturing sector – it is often called the “workshop of the world” – its services sector will pass the 50pc threshold of GDP over the next couple of years.

South Korea is a partial exception. Over more than a decade and a half, the share of services in its economy has remained broadly stable and despite having reached western levels of per capita incomes, it has a considerably smaller services sector than the average in the rich world.

Again, and as in the Irish case, it is because manufacturing has remained strong there – no matter where you are in the world today the phone in your pocket, the TV in your home and the car that you drive could very well be Korean-made.

But as Korean and other manufacturers become ever more efficient, the numbers employed in the making of things will certainly continue its long-term decline. That brings us back to the matter of the need for services jobs and fears that they, too, will fall victim to technology and off-shoring.

Let’s start by looking at the facts. The 15 long-standing members of the EU, of which Ireland is one, include most of the highest wage and most technologically advanced economies in the world. If the end-of-work thesis was correct, you would expect to see it gradually squeezing the numbers employed in those countries. But that is not what has happened.

In 1993, 148 million people were employed in the EU-15. Last year, 20 years on, the number was 24 million higher.

Although it is down from its all time peak in 2008, that is because of the financial crash, not a change in the underlying long-term trend. Moreover, all the net employment gains over that time have come from services.

But it is not just the raw numbers that show an increase. The trend has been for more working age adults to be employed not fewer, as the second chart shows, and there is no evidence to suggest the dip in recent years is related to a structural decline rather than the effects of the crash.

The reason for this is that new kinds of services jobs are coming into being all the time – a pattern illustrated very nicely recently by this newspaper’s Sarah Stack when she compiled a list of 50 jobs of the future*.

Our species has limitless needs and wants. We also have limitless imagination and creativity.

Together they will ensure that most people will always be gainfully employed most of the time.

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