Breaking up (the economy) is hard to do

After manufacturing, the service sector is a bad rebound option for workers

Change happens all of the time (in a healthy economy) but sometimes it is harder to take. Amid the constant churn of companies going bust and people losing their jobs, new businesses reshaped the economy as manufacturing took over from agriculture before the service sector became the mainstay. The initial shift from farm to factory created new combinations of man and machine that, after a rough start, seemed to be like a match made in heaven with productivity gains spurring on higher wages for workers. The good times could not last forever however with fewer people needed on production lines, but service jobs have proved to be a poor replacement and have left workers wanting more.

From the Industrial Revolution to modern day China, factories have provided employment that has acted as a route to escape the drudgery of toiling on the land and to realize a better life. Yet, as much as manufacturing jobs are still prized in many places, such work has been hard to find, due in part to offshoring of production but also growing levels of automation meaning that even more goods can be made with fewer workers. The productivity gains that have enabled more to be produced with less could be seen as a success as maximizing output with limited resources is one of the primary goals of any economy.

Even though more goods can be produced at lower cost, there is a tendency for people to shift their spending to services instead as the level of wealth grows. As such, the trends of rising productivity combined with falling demand (relative to services) meant that manufacturing could only power on the economy for a limited period of time. There would inevitably be a point in which more stuff could be produced but people would rather spend their cash on something else. With the manufacturing industry needing less resources (capital and labour) to provide what consumers wanted, more inputs went into offering up a greater range of services.

Services are inherently different to manufacturing for workers with fewer skills in the extent to which the jobs typically involve less technology that boosts the capacities (and hence wages) of workers. The transition from manufacturing to services was also different in that previous cases of shifts in employment between different sectors in the economy had been driven by workers seeking higher wages. Employers in factories could pay more than what people could earn through agriculture as the use of machinery in producing goods lifted the productivity of workers.

The rise of services as the dominant employer is different in that many of the workers with lower skills are not being drawn away from manufacturing through the lure of bigger pay packets. It is more obviously the case that the lack of work opportunities in producing goods have left workers with few other options. As such, the service sector did not have to win over workers by paying them more but could attract staff even offering only low-paid work. The only competition for workers without specialist skills was between service sector companies themselves and productivity and hence wages for such workers in this sector has always been low, so that there were no economic forces to help bolster pay levels. Employers would only need to ensure that their employees were generating enough output to justify paying at least minimum wage, although the gig economy has found ways to sidestep such restrictions.

The overall impact was to not only see a decline in wages for those moving into the service sector but for the pay packets of the low skilled across the whole economy to suffer as fewer well-paid jobs eroded their bargaining power. Much of the economic hardship has been concentrated in areas where manufacturing jobs dominated as the remaining service sector work only tends to move money around the local economy rather than to draw in funds to help sustain businesses. The resulting weaker spending would also feedback into shaping what is produced for the consumer market and likely increase the likelihood of more goods and services being made with low-paid workers.

These changes have thrown up two challenges to the status quo of economic theory that have not been properly dealt with. The dismantling of large chunks of an economy is something that has never been seen before to the degree that is happening to the manufacturing industry in the West. It has been relatively easy for the large investments that were ploughed into the buildings and machinery to be written off as capital is relatively mobile and able to absorb such risks. It is the labour force that has struggle to adapt with people being left behind even as the economy moves on. Previous transitions from farm to factory involved the same movement of people but also came with the lure of higher pay and greater freedoms compared to living off the land, whereas service sector jobs tend to offer less fulfilling work at lower pay and security.

The shift to services also served up a second problem in terms of the notion of economic growth being a linear progression of the economy with relatively minor bumps along the way. Getting people to work hard in the present is easier when they expect life will be better in the future, even if it is just for their children. Yet, the breakdown in the reliable advancement of living standards over time could be translating into a weakening in the willingness to sacrifice for greater prosperity at some point down the line. With the economy not providing the wage gains and job stability as it did in the past, people are venting their frustrations through the political system which is struggling to cope.

It is as if the economy has gone through a separation in the same way that a couple might. The combination of labour and capital in manufacturing was such a boon for the economy in terms of higher wages and rising prosperity but it was also like one of the pairings that cannot last. After it was no longer feasible for workers and the machinery to stay together, what came next for wage-earners in the service sector has been a let-down and it seems unlikely that such a good match will ever show up again, thus creating frustration among workers about what has gone before.

As such, it is not the breaking up of the economy that is the problem but that what has come after offers up less for most people than in the past. If the service sector is merely a poor plan B for many workers and there is little pay going into wallets, outlays by the average consumer will be depressed and people may see little benefit from working hard. Without this virtuous cycle of striving and spending, the economy may struggle to get its mojo back and irritation will build as people think of past glories. A breakup is even harder to take when you have to worry that your best is behind you.