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.

Unspreading the wealth

Manufacturing was about more than jobs as problems still linger

The ideal role of the economy is not only to generate wealth but to make sure that everyone gets their fair share. Spreading the cash around is important in terms of everyone having enough to get by but also for providing a source of funds that can be used to purchase what is produced in the economy. The relevance of where wages are earnt and spent seems more pertinent as the drop off in employment in manufacturing has impacted on whole regions in industrialized countries. Without the higher wages earnt from employment in the factories, not only the individual workers but whole communities suffer while economic activity shifts elsewhere.

What we think of as the economy only really took off with the rise of the manufacturing industry. Previously, most people had eked a living off the land with workers scattered across farms and toiling away in relative isolation. The rise of factories was a significant change in that it brought people together under one roof and allowed for mass production of goods that had been made by hand. Despite the often-horrendous living and working conditions in the beginning, manufacturing eventually offered a route to a better life, both in terms of providing a large volume of cheap goods but also the higher wages paid out to workers. The lure of factory jobs still draws in people from the countryside in countries that have not industrialised enough to benefit from manufacturing.

In this way, manufacturing was crucial both in terms of generating greater levels of output as well as providing money for people to spend. It was through higher factory wages that a middle class rose up to not only buy the goods rolling off the production lines but also to help create other jobs in the service sector as they spent their earnings. The boost to wages came from the use of machinery on the factory floor which set it apart from agriculture where more basic equipment had been employed. The greater use of technology meant that workers could earn more even without having to acquire any specialist knowledge for the job. The wider spread of wealth was a profound shift from how society had been set up in the past with the middle class filling the long-established gap between an impoverished majority and affluent elite.

On top of these changes, manufacturing also moved people away from their previous attachment to the land and gathered them together to work in much closer proximity. Yet the extent to which cities could grow in size was limited by the need to have essentials such as food and fuel be transported in from the surrounding farms or further afield. As such, manufacturing resulted in a larger number of towns rather than a few big cities. Even once these limits had been overcome with improvements in technology, cities often did not provide suitable location for factories which were instead more likely to be set up in places where land and wages were relatively cheap.

Manufacturing thus acted to offset the tendency for economic activity to be concentrated in cities, serving to not only distribute wealth among a wider range of individuals but also among different regions within an industrialised country. This second effect was due to the higher pay packets for factory workers acting to support a bevy of service jobs in the surrounding community. This spending from the wallets of the employees of manufacturing firms came from sales of goods beyond the immediate confines of the local community. As such, it could be argued that manufacturing brought money into the local economies where ever production was situated.

It is easy to see then that the influx of cash for spending locally would thus dry up if the factories were moved away. Any local economy needs money coming in as funds are always flowing out in the purchase of goods made elsewhere or for other things such as taxes or services not offered locally. It is often the case that the service jobs that remain tend to serve people within the community but are insufficient to sustain the existing businesses as such transactions tend to merely see money moved around the local economy.

Not all sectors within services are like this but some professional services such as finance, accounting, or law serve a wider range of clients who can be based in more far-flung places. Such businesses with their skilled workforce tend to be concentrated in a few places and provide the basis for the large cities which have flourished. The demand for such professional services has grown along with the spread of international markets and the growing complexity of global production. At the same time, a mass of jobs has been created around such global service centres which have become the new focal points for the economy.

The large metropolises may be booming now, in part because of such a role in managing the global economy but also because they are, in some ways, the “last man-standing” in terms of offering high-paid jobs. On top of this, manufacturing is unlikely to make a comeback as, just like agriculture before it, the number of jobs on offer was always likely to diminish over time. Similar to farms, factories have a workforce declining due to the rising use of machines and greater wealth causing people to spend more money on other things. Yet, while rising food prices can bring wealth (if not much employment) to the countryside, trends in manufacturing are more likely to see fewer and fewer sites for production as bigger factories are more efficient especially when goods can be transported cheaply.

Cheaper transport and communication mean that factories no longer need to be limited to places where labour and land are cheap within industrialized countries but are free to be situated anywhere. As such, the effect of manufacturing spreading the wealth, while greatly diminished in Western countries, now instead operates on a global scale. While everyone has benefited from cheaper prices thanks to lower labour costs, it is the places at which manufacturing sites have been located that have seen the most advantages as the higher wages act to lift the local economy. It is as if the jobs in services that would have provided employment in the factory towns in the West have also been offshored.

While many have moved on, these changes have left some in industrialized countries stranded as the shift towards cities offers up little in terms of job opportunities. Manufacturing provided a workplace for people with a range of skills that are different to those who might thrive in the new knowledge economy and even get by in the broader service sector. The wider dispersion of economic activity also allowed more scope for people who preferred the greater security and closer community of smaller towns to the more individualist cosmopolitan culture of city life. On top of this, such challenges would have been easier to bear when placed on the shoulders of individuals dispersed throughout society, but the concentration of people left behind by economic growth is more difficult to deal with.

Although people are deemed to be responsible for their own fortunes, this stance is more difficult to defend when it is previously prosperous regions that suffer as economic activity moves elsewhere. With more to lose in terms of both material possessions as well as a sense of identity compared with the past, many individuals have proven unable to keep up with the demands of economic change. Government policies such as “levelling up” suggest more sympathy towards communities that have fallen behind, but the scope of the problem and the relentless forces of global capitalism mean that there is little that can likely be done. Only time will tell if it is people themselves that will need to continually reshape their lives to fit with the changing economy or if more will be done to bend the economy to the will of the people.

Social (and economic) distancing

Globalization is a boon for the economy but is politically splitting us apart

Many people increasingly feel distant from the economy and see it as something that has little to offer. One reason behind this is that much of the goods (but not yet services) that we consume are produced far away. This separation comes from production being centralized as improvements to transportation and communication remove constraints that limited where factories might be set up. While helping to lower prices, this trend has also resulted in the concentration of high-earning jobs in a few locations and thus caused growing separation between the economic winners and losers. Without anything to reverse this shift, greater separation of production and purchasing may deepen the split within society.

Before the advent of what we think of as the economy, (almost) everything was made by people for their own use. It was only with larger societies that people began to specialise in certain tasks and increasingly relied on obtaining things from others for many of their needs. It has become easier to move goods, people, and information around so that the places where goods were made and shops for selling the goods were located further and further apart. The result of this development has been for larger scale operations that can make things more cheaply since there is the potential to serve a wider range of customers.

This outcome has been more typical in manufacturing which has increasingly been concentrated in fewer places with higher output. Gains in productivity, as businesses apply more automation and improve their operations, mean that less labour is required in output. As well as producing more with fewer workers, manufacturing has also become less important to the economy as we spend more money on services which tend to be produced differently. Instead of output being generated in mass at one location, services are more likely to be produced in numerous scattered locations. This is because services are often consumed at the site of production, whether it be a meal, a massage, or a manicure.

The dispersed nature of services means that it is more difficult to generate efficiency through mass production as was the case with manufacturing. Greater productivity is the main driver for higher wages (workers that produce more tend to get paid more) and so more people employed in the service sector means that wage gains are likely to be harder to come by. Another reason why such jobs pay less is that the work typically involves less technology that would raise the output of workers. The overall labour market might also suffer if workers have less options in terms of work opportunities and hence are inclined to accept lower levels of pay.

With workers closer to the point of consumption in the service sector, any wages are likely to benefit the local economy where the services are offered. Such jobs are also more numerous and continuing to grow in number, but the lower wages seems that the impact is limited. The overall result is that the greater quantity of service jobs does not seem to make up for the drop in quality (in terms of pay) even though the money from wages is more likely to be spent locally. Low-paid service jobs in themselves are not enough to keep a local economy afloat without customers with more money to spend (either from work in manufacturing or other skilled employment).

The effects of the transition from manufacturing to services has not been felt evenly between countries or even within national borders. The offshoring of manufacturing has resulted in the benefits of productivity gains (such as higher wages) being realised in places that are distant from the place of purchase (even though lower prices benefit everyone). Western countries had been the initial beneficiaries of industrialization but now many in the West feel as if they are missing out as production shifts elsewhere. Such a development would not be a problem if higher manufacturing wages would spur on economies elsewhere but the impact seems to be limited. A further issue is that manufacturing is increasingly concentrated in fewer places due to efficiencies generated in large-scale production.

Despite factories being moved overseas, the West has maintained its role in managing the increasingly complex global production system. Yet, the jobs involved in management along with auxiliary tasks such as financing, law, and accounting have also been grouped together in a concentrated manner and expanded to take on international work. So while old manufacturing hubs have deteriorated and pulled down surrounding areas, larger cities have thrived as office work expands (both in terms of numbers and in higher wages) to fill out the new global role.

These divided fortunes for countries in the West have complicated the response by government as politics typically focuses on the split between left and right rather than balancing the pros and cons of being part of a global economy. The economy can be running both hot and cold within the same country but any tendency for this to even out seems muted. Taxes had previously been used to transfer funds from the more prosperous to the less fortunate but the majority of voters no longer see that as an option. Without some other economic or political means to bring us together, the differing economic fortunes can only drive us further apart.

Rage without the machine

The disappearance of an old foe leaves workers angry in its absence

Machines are normally portrayed as something threatening and potentially overpowering. Yet, it was only with the rise of the machines that people were able to boost their output enough for the bulk of society (in the West) to live in relative comfort. The combination of man and machine working in tandem also brought the middle class into existence, with the bounty of economic growth being shared relatively widely. Yet the forces that brought this about seems to have gone into reverse as both machines and the way we use them have changed, leaving many raging for times since passed.

The extent to what we could produce was limited in the past to what a person would achieve with the help of tools or farm animals. More could be harvested through harnessing the power of wind or water but the extent to which is could be applied was limited. It was only with the advent of engines powered by steam or petrol that output capacity really took off. It was not just individual workers toiling with their machines in isolation but coming together under one roof that raised labour to its most productive.

Such manufacturing enterprises offered up big gains in output per worker, especially with the shift of the population from their previous existence eking a living off the land (without the use of technology). The machinery involved was simple due to both the basic level of technology as well as the reliance on workers without technical knowledge. Over time, the machinery became more complex and increasingly required specialized skills, with demand for education rising so that workers could keep up. Pay improved as output rose (and workers banded together to demand more), but machines also developed to be able to handle an increasing range of tasks.

As such, automation enables factories to produce more while keeping labour costs down. Offshoring of production provided a different route to a similar outcome but made the change seem more dramatic as factories in the West were shuttered (instead of a gradual diminishing of employment in manufacturing that would have occurred with automation). As factory jobs became increasingly scarce, more employment shifted to the service sector where the level of technology (and hence pay) is typically low. Thus, the employment prospects of workers with low levels of specialist skills suffered due to both starting at lower levels of pay with, as described below, less opportunity for advancement.

As well as offering up higher wages for new recruits, manufacturing also allowed for workers to build up skills on the job as their knowledge of the production process expanded along with their length of employment. The production of goods would typically require a large number of different actions, and as such, the machinery would be designed with different tasks in mind. The vast division of labour into separate roles within a factory would mean that workers would develop knowledge relating to their individual sphere of work. Productivity (and hence pay) would typically rise with the length of service as more skills are learnt on-the-job.

Even in the case of workplaces in the service sector with high levels of technology (such as a logistics warehouse), the skill levels are low as machinery does much of the work. The use of software (in terms of, for example, how to fulfil an order) means that there is little scope for workers to get better at their job. It would be expected that workers could reach peak productivity within a relatively short period on the job. As well as being separated from machines, workers in the service sector also suffer from less division of labour with much of the work being similar in nature rather than specialized on separate tasks.

Any technology that is used in the service sector tends to be in the background so as to organize rather than to produce. This organization typically involves making sure that people or goods are in the right place at the right time. The limited use of technology is partly because the service sector is inherently impervious to technological improvement. Services often involve people being at the point of sale ready to act out their task when required. As such, jobs such as a waiter, teacher, or nurse would have changed but only at the margins, while the core features would remain the same.

Not only were men and machine working together in manufacturing but many people gathered in one place to work under the same roof. This higher density of workers was probably important in the formation of trade unions and demanding higher pay and better conditions. Workers in the service sector are more spread out, which, along with the limited scope for picking up skills on the job, leaves them with little leverage to get concessions from their employers. This decline in relative position is obvious in lower levels of pay for labour but also in other aspects such as shown through zero-hour contracts which gives employers more control over workers.

Not only is the predicament of service-sector workers hurting those employed in such jobs but may also be having a wider impact across the whole labour market. The lower pay for workers in service jobs also damages the job prospects of those working in other sectors of the economy as it limits the options of people to move to better jobs. Higher pay in manufacturing had been seen to boost the plight of all workers, but the switch in employment in services may be having the opposite effect.

These changes within the job market go some way to explain how employment can be high but wage gains have been weak. Even with a relatively tight labour market (such as after the Covid lockdown), increases in wages remain limited in scope (which may be in part due to an inability of employers to pass on the costs of a higher wage bill through higher prices). The shift from manufacturing to services also seems to have the effect of concentrating economic activity in larger cities with other places suffering as a result. The broad consensus regarding an open economy with free movement of goods and people was, in part, based on the economic security provided through manufacturing jobs.

Without the relative abundance of such “good jobs”, the politics of economic growth becomes more difficult. Much about politics these days is about a return to a better past, with slogans such as “take back control” and “make America great again”. These glory days of old often involve a large manufacturing sector and all of the jobs and prosperity that comes with bring with it. Yet, the economy has changed and does not work in reverse. Even attempts to keep manufacturing jobs from moving overseas is also likely to be a lost cause as machines have reached the stage when only minimal human input is necessary for a growing number of tasks. And on top of this, the impact of a few manufacturing jobs will likely be much smaller relative to when factory work was readily available.

The focus on jobs and employment (like the emphasis on economic output) hides many of the important details. It seems to be the frustration bubbling up in politics rather than the usual economic indicators that might provide a better measure for the health of the economy. Without an understanding of what lies behind the numbers, all can seem well while the reality might be that the economy is not providing prosperity as it once did. It may be discontent, rather than data, that paints a truer picture.

Economic growth – far, far away

Prosperity is becoming more like a fairy tale to many as economic growth recedes

Many a story begins with the words – “once upon a time, in a land far, far away”. For a growing number of people in developed countries, this opening line sounds like the beginning of a tale about economic growth. Trends such as globalization have increasingly resulted in winners and losers in a way that those who gain are increasingly separated from those who miss out. Thus, economic growth can seem a world away to many people as if a mere fairy tale.

For a few decades after the world wars, it seemed as if the tale of economic growth would be one of those stories with a happy ending. In the West at least, the economy was providing decent wages for most people in jobs and mass consumerism was offering up everything anyone might want. The rest of the world was still stuck in relative poverty but the expectation was that they too could catch up later.

The narrative changed as manufacturing started up in developing countries. Factories had helped boost wages in the West by making workers more productive, but rising pay also increased the lure of cheaper labour elsewhere. The progress was gradual but eventually the growing capacity of manufacturers in Asia, culminating with the rise of China, eroded the high-wage manufacturing sector in the West that had helped build the middle class. Automation was always likely to have the same effect but globalization accelerated the trend and has thus borne the brunt of the blame.

Globalization has made things worse in other ways too. The ease of transportation that is a part of globalization also means that places where goods are produced often being separated from the point of sale. So even though everyone will benefit from lower prices, any wage gains from more productive manufacturing will tend to remain close to the factories. So just as has happened in the West, China prospered as manufacturing created a new middle class there.

The site of production is important in that it takes away not only the work but also much of the future benefits of higher wages generated by productivity gains. And once a manufacturing base is established, a whole ecosystem of business builds up around it. So, the high-tech production facilities central to electronics and computing are likely to stay in Asia in the same way that Detroit dominated car making for so long.

On top of this, globalization has had an impact through offering up larger markets and hence creating bigger business. An increase in scale usually helps companies be more efficient and provide goods and services more cheaply. But bulking up in size also comes with more automation and outsourcing that are used as means to save on labour costs. Being bigger also helps business get its own way with governments as well so as to limit the extent to which policy might boost wages or provide economic support.

The increase in the scale of global markets is also good for those with skills to sell on an international level. Such skilled workers tend to migrate to the larger cities where it is easier to promote their increasingly specialised talents. And the freedom to move around within borders means that people increasingly sort themselves into likeminded neighbourhoods which often overlap with economic outcomes.

Previously, greater proximity of people from different economic classes would have meant that some of the spending by the well-off would have gone into the pockets of people from the “other side of the tracks”. With the service-based economy, much of the spending nowadays would not reach to the other side of the country. Even when able to work for big business or the wealthy, those on lower wages miss out as, even though their earnings would probably be higher, they also typically need to fork out more for higher living costs.

So previously, market forces might have been sufficient to spread the wealth. Higher consumption by some would see more money going to others who had less to spend. So even if some were doing better than others, a rising tide would have lifted all boats as JFK suggested. But the changes to the economy outlined above means that things are different from the 1960s. The greater physical and cultural separation means that market forces would not be sufficient to spread wealth as in the past.

What is true within borders is even more relevant when looking on an international scale. The growing levels of wealth in places like China could potentially offer opportunities for work in the West. Yet, the intricacies of Asian culture often mean that many consumer goods are produced locally for the domestic markets. With limited access for imports, Asia has become just a source of cheap goods and not so many job opportunities for workers in the West (bring us to the same conclusion that was expected of automation).

Out of those prospering from globalization, it is no surprise that the foreigners are getting most of the blame. The greater distance separating those prospering in the East from those struggling in the West means that it is more difficult to share around the new-found wealth. And big business is more likely to provide the precious jobs back home, which is used as a reason to argue for measures such as lower taxation to help create work.

Yet, there is a good argument for the government needing to come up with resources to do more. There is a notion in economics that, if the market is not working as one would hope, then there is scope for the government to step in. We are seeing this happening in terms of the “levelling up” policies of Boris Johnson and the stimulus package by the Biden administration. Yet more permanent policies need to be established to rectify what seems like a persistent feature of the economy and what could potentially result in a backlash. And that would be an ugly end to the story of economic growth.