Above we suggested two trends to characterise the structural change of advanced economies. We identified them as changes in the welfare state and as a
‘complexification’ of economic activity. Both pose challenges to our understanding of these changes and raise the need for a better understanding of
• structural changes at an aggregate level,
• changes at industry- and firm-level, and
• the dynamics behind these changes.
Whereas the first trend is a wider process, the second one is dominated by economic interactions and economically motivated processes. This allows an economic approach to this trend, whereas analysis of changes to wider social welfare requires a multi-disciplinary approach. In this report our focus is restricted to the economic trend, and primarily to the last two points as they apply to services. In our future work we will consider the further extension to include other sectors, and to aggregate social changes.
The modern period of studies of the emerging economy started in the mid-1960s. In The New Industrial State (Galbraith 1967), Galbraith described what he regarded as the main structural reorganisation of economic production in the new era. He saw a new industrial organisation emerging, replacing the capital-based and owner-managed industrial organisation that was completed in the first post-war period. What John Galbraith saw as the fundamental new feature of industrial production and value-creation was the emergence of a new governance structure in large scale industries, viz., a knowledge-intensive management structure with a different set of interests than the previous ‘owner-manager’. Combined with increased abundance of capital, and hence a weakened power base for it in initiating and organising commercial activity, this paved the way for the technostructure as the critical factor that would shape progressive industries.
Thus Galbraith clearly saw the vital role that knowledge and expertise would play in organising future economic activity, but he chose to interpret it as a reorganisation of manufacturing industries, with large scale, technology-intensive industries as
‘vanguards’ of the new industrial restructuring. But what he did not take into account was that the underlying processes he used as a basis for his predicaments about manufacturing industries, also opened up for a restructuring of vital services and the relation between these service functions and manufacturing activities. Hence we will regard John Galbraith primarily as a beaming culmination of previous analytical approaches to structural change in capitalist economies, rather than as an approach that establishes a genuinely new ‘mind-set’. This is not to deny, however, that Galbraith’s analysis definitely points forward and renews old approaches, but his manufacturing ‘bias’ lets him by-pass at least one of the characteristic dimensions of the restructuring of economic systems during the last decades.
Almost simultaneously with the publication of Galbraith’s book, Victor Fuchs
published the first modern approach to the emergence of the ‘service economy’ (Fuchs 1968). In contrast to Galbraith, Fuchs took as a starting point that the characterising feature of the development of the capitalist system in the modern era is the emergence of a complex of services. The analysis was substantiated by cosiderable use of
statistical data to identify characteristics and drivers of change processes. Fuchs followed the lead of Colin Clark (Clark 1957); ‘tertiarisation’ is the next stage of economic development in industrialised countries. Fuchs hypothesised and elaborated three broad explanations of structural change in modern economies and the
concomitant employment growth in services. The three explanations, that have been elaborated and used widely in the literature following Fuchs, were
• an ‘Engelian’ argument about the consumer income elasticity of consumer goods and services.10 As real incomes increase, the share of services in total consumption will rise with rising income, other things being equal, due to the high income elasticity of services. Increased demand for services will force an increase in service employment,
• ‘techno-structural’ arguments of intermediate service demand, i.e. changed division of labour in production processes; because of increased use of specialised services in production, or as a consequence of reduced transaction costs towards producer services, and
• ‘cost disease’ arguments; the lower productivity growth rate of services creates the need for ‘running to remain on the same spot’, i.e., an escalating real price of services relative to manufacturing products. This will either lead to all income being spent on services, to a degradation of service quality to restrain galloping prices, or to accelerated social innovation.
Fuchs argued on the basis of statistical data that slower growth of labour productivity in service industries was the major explanator of the shift into service employment in the US between 1929 and 1965. On the basis of Fuchs’ data, the productivity gap is estimated to account for 55% of the growth of the service share, while the income hypothesis explains just 14% of the growth. The residual of about 30% includes the techno-structural arguments, as well as exogenous demand shifts of services. Data for the period 1966-1981 suggest that income effects explain only 7% of the service share growth, while the cost disease argument accounts for about 25%. As a consequence, the residual has more than doubled in comparison to the previous period, suggesting
10 It is called Engelian to refer to the study of consumption of food by Belgian population in the 1860s by the Preussian statistician Ernst Engel. He showed that the incom elasticity of food demand was less than one, i.e. that as income grows the food consumption grows less than proportionally. The share of food consumption will decrease as income grows. In that sense we maight say that Engel predicted the relative decline of the agricultural sector. Engel’s law is usually stated to mean that as average real income grows, the consumption share of goods with a high income elasticity will increase, at the cost of a reduced share of low income elasticity goods. The Engelian service argument is that service demand has an income elasticitiy greater than one.
that new mechanisms are active in more recent periods. These data are discussed in Inman 1985b.
The size of the residual suggests a need to go beyond these three arguments. The first set of such extensions would be to include substitutability and complementarities between consumption of tangible and intangible goods. These include
complementarities between tangible goods and services through a clustering of consumption; consumption of tangible goods - such as household durables and other capital goods - enhance the demand for related services, as well as vice versa (see Stanback 1979). Secondly they have been supplemented by the ‘post-Engelian’
argument of Gershuny 1978; an increased substitutability between material goods and services as to the provision of utility, shifts demand from services to material goods.
This is reinforced by changes in social behaviour that alter consumption patterns in significant ways, through ‘social innovations’ (Gershuny and Miles 1983).
The overall ‘service content’ of the economy grows, with a shift towards higher skilled white collar employment in most industries, away from low- or un-skilled blue collar employment. This is accompanied by an increase in flexible, service-like production methods in several manufacturing industries, the evolution of ‘post-Fordist’ production. As the structure of labour markets and work relations have a strong Fordist heritage, there are strong contingencies between the dominant modes of production organisation on the one hand and work organisation and governance structures on the other. Increased flexibility of work arrangements and dissolving barriers between work and leisure, between education/training and knowledge and skill use suggest new forms of work relations in several functions. These processes could lead to increased externalisation of service functions, and hence contribute to increased service employment.
It may be difficult to distinguish the effects of these processes from effects of the three arguments given above, particularly the ‘techno-structural’ argument. The post-Fordist argument may even be claimed to be a subset of the techno-structural arguments. Both types of arguments find among their causes a changed role of inputs to production processes; particularly of information inputs. But whereas the post-Fordist argument describes an adaptive process to wider socio-economic changes, the techno-structural argument concerns both reactive and proactive changes. On the other hand it is
restricted to production or market characteristics, whereas the post-Fordist argument is wider in scope.
It is immediately evident that all these arguments contain elements of truth and
contribute to the evolving process; the development of modern capitalist societies. It is equally evident that these arguments are mutually interdependent. Nevertheless, based on historical data, the role of the cost disease argument in explaining the share of employment in service sectors seems to be significant, but the balance may have shifted towards more ‘techno-structural’ arguments over time. This underscores the need to understand the unfolding dynamics and their consequences on at least two levels; at policy level the development is important both in terms of general welfare policy and as a prerequisite for relevant industrial policies, at the business and industry level they determine the possibilities for business strategies.
This leads to the two great paradoxes of this area of research; dynamics involving service sectors have been under-focused both in the research attention it has received, though with some notable exceptions, and in policy formulation. The implicit
assumption seems to be that manufacturing is still what matters. There are, however, signs of a change in awareness of the issues involved, as the following citation from the Delors White Paper suggests:
“The key elements in competitiveness that are now of greatest importance ... include in particular the quality of education and training , the efficiency of industrial organisation, the capacity to make continuous improvement in production processes, the intensity of R&D and its exploitation, the fluidity of the conditions under which markets operate, the availability of competitive service infrastructures, product quality and the way in which corporate strategies take example of the consequences of changes in society, such as improved environmental protection.” (EC 1993)
To what extent these changed attitudes affect policy content is more uncertain. The attention given to service related issues in recent OECD work, such as the study Technology, Productivity and Job Creation (OECD 1996a) and the forthcoming edition of the Science and Technology Policy Outlook11 is noteworthy. The role OECD projects have played in the past as indicators of policy change in member countries suggests an emerging reorientation of national policies. Similarly, a large study of the Danish economy was undertaken recently as a background for Danish industrial policies. This study included a substantial focus on service sectors, on a par with other industrial sectors, see f.i. Erhvervsfremmestyrelsen 1994.
The patterns or features showing up in aggregate statistics or overall behaviour are contingent on or shaped by microlevel activities and processes. Changes in labour productivity are aggregations of various change processes at the micro-level,
processes that involve technological innovation, organisational change, learning and development of new business areas. But these are not autonomous local processes;
there are strong complementarities and systemic features across firms and industries.
These processes participate in national innovation systems.
This suggests a need to combine studies of microlevel data with a framework of meso-and macro-level meso-and analytical projects that incorporate such systemic features. The focus on change processes suggests that a central element must be innovation processes; innovation processes are a central, if not the central element in the reshuffling of cards that generates aggregate change patterns.