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The Economist: Services stigma

By By Ray Perryman
Sept. 1, 2012 at 4:01 a.m.


The economy - whether you look at the data from a national, state or local viewpoint - is becoming increasingly services oriented. This simple statement is amazingly powerful in its ability to generate strong reactions. Some people have a perception that this is an inherently bad thing which will, over time, erode the competitiveness and sustainability of the United States. Others perceive that the services sector jobs are of poor quality, with low pay and few benefits. The reality is quite different.

The phrase "services sector" is actually often misunderstood. If you ask 10 people what's included, you'll likely get 10 different answers. First of all, it's important to remember that we are talking about an industry group, not an occupation.

At the broadest level, the economy can be broken down into goods-producing sectors (mining, construction and manufacturing) and essentially everything else (except for agriculture, which is often separated in discussions of employment). This broad definition places everything from utilities to transportation to financial activities to health care to government under the umbrella of services. Under this definition, only about 17.7 million jobs (in 2010) in the U.S. were goods producing of a total non-agriculture wage and salary employment figure of 130.4 million.

When economists talk about the services sector, however, we have a somewhat narrower scope in mind. In my forecasts, for instance, the subsets of the services category include things like professional services firms (like accounting or law firms), hospitals, museums, food services (restaurants) and others. Clearly, adding jobs in many of these areas is desirable and good for the economy.

There is certainly a range of average pay within the services segment, and some industry groups tend to fall at the lower end of the scale. In leisure and hospitality, for example, average hourly earnings were $13.38. However, professional and business services paid an average of $28.15 per hour, and education and health services paid $24.12.

Even for the lower-end industry groups, however, typical pay is significantly higher than the Federal minimum wage. If you really dive into what a minimum wage (or worse) job tends to look like, you'll find that they're actually not very common; most workers are doing much better than that, regardless of the industry they're employed within.

The Bureau of Labor Statistics released a study earlier this year describing the characteristics of minimum wage workers in 2011. The BLS found that in 2011, 73.9 million American workers age 16 or older were paid at hourly rates (that's more than 59 percent of all wage and salary workers). Of those, just 1.7 million were paid minimum wage, with another 2.2 million paid below the minimum. (There are legal exemptions from paying minimum wage in certain circumstances.)

Minimum wage workers tend to be young; 23 percent of employed teenagers earned minimum wage compared to 3 percent of workers age 25 or over. Part-time workers were also far more likely to be paid the minimum (13 percent compared to 2 percent of full-time workers).

The industry with the highest proportion of workers paid minimum wage was leisure and hospitality, where 22 percent of workers earned that level of pay. In fact, about half of all minimum wage workers were employed in this industry group, primarily in restaurants and other food services. (However, it is important to note that these pay scales do not include tips, which can be a substantial component of overall earnings.)

The study also found that the share of workers paid minimum wage is dropping, down from 6 percent in 2010 to 5.2 percent in 2011. Moreover, this is far less than the 13.4 percent estimate from 1979, when regular collection of minimum wage data began.

The shift toward a higher proportion of people working in service-producing industries is a natural continuation of a trend which began with the Industrial Revolution, when machines enabled more output to be produced with fewer laborers.

While it is true that keeping a strong and vital base of manufacturing can enhance long-term prosperity, it is simply wrong to imply that growth in services industries is somehow undesirable. When it comes down to it, some of the highest-profile, best-paid and most-prestigious jobs are services positions including doctors, lawyers, college professors, engineers, architects and many others.

Many of them also export their talents around the world and thus become a source of international payments to the United States (we actually consistently run a surplus in the balance of payments for services) - just another sign of the changing times.

Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.

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