The Post-Industrial Era Is Over

The sun is about to set on the post-industrial era.

No one should mourn its passing.

In the post-industrial era, service jobs were supposed to replace the manufacturing jobs lost to foreign competition, much as manufacturing employment once replaced the farm jobs lost to higher agricultural productivity. To theorists of the 1950’s, this meant a transition from an economy based on dirty heavy industry to one based on clean, well-lit offices. No more Pittsburghs.

This scenario always had problems. While services have created most new jobs – 88 percent of all new jobs in the past 10 years – average service wages have been well below average manufacturing wages and productivity has suffered mightily.

In the decade ahead, however, demand for services will slow down. Wages will rise and, as a result, productivity in the service sector will grow more rapidly while many fewer service jobs will be created. There are several reasons for this.

Most of the growth in service employment (91 percent) in the past 10 years is traceable to three rapidly growing industries: health care (17 percent), retail trade (29 percent) and producers services (45 percent). If output in these industries were to grow more slowly or productivity were to start rising, the rapid expansion of the service sector would come to a halt. Both are about to happen.

The demand for health care has risen because of the interactions between an aging population, the development of expensive new technologies to treat the ailments of old age and expanding health insurance coverage for the elderly. These factors will continue but the rising expenditure trends cannot. Moves are now under way to limit spending on health care. When these efforts are successful, and ultimately they must be successful, health care employment will stop rising.

The rapid expansion of the retail sector is the product primarily of the explosive growth in the numbers of working women. The result is fewer meals eaten at home and the new convenience of shopping 24 hours a day, seven days a week. In both cases, there are natural limits to expansion that we are not far from reaching.

The growth in financial services (a major component of producers services) is easily explained by the telecommunication-computer revolution and the abolition of Government capital controls. Together they produced a world capital market with a wide array of new financial instruments.

But the expansion in financial services is essentially a one-shot adjustment to these changes. When that adjustment is completed, and most of it is now behind us, employment growth automatically will slow down. Lacking strong and e

Lacking strong and effective unions, U.S. service workers have never been paid as well as their foreign counterparts. Private service workers in the U.S. earn only 67 percent as much as those in manufacturing. In Japan. they earn 93 percent as much and in West Germany 85 percent as much.

Low service wages have had two effects. First, they have allowed an enormous expansion of jobs, as people did the work in the U.S. that was being done by machines abroad. Parking lot attendants are unknown in Sweden, where they have been replaced by plastic cards. With automatic ticket-selling machines, automatic ticket checking and unattended lift loadings, Swiss ski resorts use few workers. Unattended machines sell gasoline at night in Europe.

Second, low service wages dragged down productivity growth rates, creating a productivity crisis that is still the focus of public policy debate. grown at the rate of West Germany’s, the U.S. would have added only 3.5 million service jobs between 1972 and 1983, compared with the 14.2 million jobs that were actually created.

The reason productivity growth lagged was that U.S. companies invested relatively little capital per worker compared with other advanced nations. In Japan or West Germany, for example, capital investment per worker in the service sector is much higher and growing twice as fast. If service wages were to rise, American companies would be forced to use those same higher productivity technologies.

And service wages are about to rise. The reason? The U.S will one day have to balance its trade deficit. To achieve a trade balance, America must either export more manufactured goods or replace imports with domestically made alternatives. There is no other way. The green revolution has eliminated most American agricultural export markets and the amount of services that can be exported is limited; most services simply have to be produced where they are used.

To produce the goods needed to balance the trade accounts, American manufacturers will need to hire 4 million to 5 million new workers. With the baby boom generation fully employed and the subsequent ”baby bust” generation reaching working age, the labor pool will be shrinking. Thus, most of these workers will have to be attracted from the service sector. This will lead to a shortage of workers, rising service wages and, as a result, greater investment in labor-saving technologies. Productivity will rise sharply and many fewer people will be needed.

The combination of slowing demand and accelerating productivity growth in services should spell the end of the post-industrial era. What is replacing it is old-fashioned manufacturing with a modern, robotics face. The only question is whether the manufacturing will be done by American companies or foreign.