Service-Sector Jobs Growth No Cause for Concern

Over the past 20 years, Orange County’s economy has been transformed from a bedroom community into a mature and diversified economy. In this process, Orange County experienced rapid economic growth and a high level of job formation. Total Orange County non-agricultural employment increased from 474,000 in 1972 to 1.126 million in 1992, an annual average increase of 4.4%.

The service-producing sector of the economy grew at a much more rapid rate than the goods-producing sector over this period. From 1972 to 1992, the service-producing sector generated nearly 547,000 jobs, an annual average increase of 5.2%. The goods-producing sector, which includes mining, construction and manufacturing industries, generated 105,000 jobs, an annual average increase of only 2.5%.

This unbalanced growth has raised some concerns that Orange County’s economy is being converted from a goods-producing economy into a service-producing one and that this trend is not healthy for the economy. This argument is not necessarily valid.

The share of the goods-producing sector of Orange County’s economy decreased from 34% of total non-agricultural employment in 1972 to 24% in 1992. Several factors exacerbated this trend. The 1990-91 recession, which was relatively mild and short-lived at the national level, adversely affected Orange County for three years and had an especially adverse impact on the construction and manufacturing sectors. In addition, defense spending cutbacks caused significant job losses. But even if the impact of the recession and the job losses derived from corporate downsizing and defense spending cutbacks are disregarded, the share of the goods-producing sector of the economy was already shrinking over time and this should not be surprising. Why?

First, the goods-producing sector, particularly manufacturing, is more receptive to adopting advanced technological changes than the service-producing sector. Consequently, labor productivity in the goods-producing sector grows faster than the rest of the economy. As a result, increases in demand for manufactured goods are being satisfied mostly by improvement in productivity rather than the increase in employment. Secondly, the service-producing sector is typically labor-intensive operations where higher demand could mostly be satisfied by an increase in employment.

Finally, the rapid growth of the service-producing sector of Orange County has been in response to increasing population. A large quantity of manufactured goods is exported to other parts of the country and abroad. Output of the service-producing sector, however, is produced mainly for the region’s consumption. Indeed, as the population of Orange County grew, employment in retail trade, services, real estate, public utilities and transportation, and local government experienced rapid growth.

Is anything wrong with a region’s economy if the concentration of jobs is in the non-goods producing sectors? The conventional argument is that manufacturing jobs are typically higher paid than other jobs, and the increase in non-manufacturing jobs at the expense of manufacturing jobs will hinder the region’s income growth. But in Orange County, the average hourly wage in the manufacturing sector in 1992 was $12.21, only 28 cents more than the service-producing sector. Contrary to common belief, service jobs are no longer limited to flipping hamburgers or washing cars. The quality of service jobs has steadily improved. Continuous increases in demand for data processing, telecommunications, financial, legal and health care services have induced a rapid growth in jobs that require a high level of skills and training, and pay relatively high salaries.

No one can really predetermine an optimal mix of goods-producing and service-producing industries. At higher stages of economic development and growth, non-manufacturing jobs are expected to grow at a faster rate. In the process, firms will constantly consider expanding, relocating and shutting down operations in response to the economic environment, and this is as it should be in a free market system.