Growing Shift in Favor of Service Sector - Assignment Example

Economics Assignment Table of Contents Table of Contents 1 Introduction 2 Growing shift in favor of service sector 2 Causes of the shift- 3 Dictates of modern markets for the business 6 Conclusion 9 Reference 11 Introduction The signs of deindustrialization are increasing in United Kingdom with the employment shift from manufacturing industry to the services industry. Various developing countries faced a slowdown in the industrial activity from the beginning of 1980 (Center for Economic Policy Analysis, 1999). Deindustrialization refers to reduction in the level of industrial activity especially in the manufacturing sector. This is not just limited to UK as many countries have faced a similar fate of declining manufacturing activity. Despite the shift, the industrial output of UK has remained stable. According to Organization for Economic Co-operation and Development (OECD) there has been a substantial decline in the man-power in the industry in the last forty years. But this has not impacted the industrial output and sales which in turn has moved up alongside. This is the result of rise in productivity. So, deindustrialization refers to the industry being displaced by the service sector both in terms of GDP as well as employment of workforce (Economics Help, n.d.). Growing shift in favor of service sector The economic structure of UK has changed over the last 35 years. Its image of industrial economy has undergone a change. Due to the shift in the favor of service industry, the manufacturing industry has lost its sheen and its contribution towards the national GDP has declined as it produces only 15 percent of the national output and employs lesser number of people than in 1964. The employment as well as output of the economy is dominated by the service sector. An economy is divided into mainly three sectors depending upon its activity. There are essentially three sectors- primary sector, secondary sector and tertiary sector. The primary sector includes activities such as farming, extraction of oil and mining. Similarly, manufacturing is the principal activity of the secondary sector whereas tertiary sector includes services like banking, insurance, finance etc. A structural change refers to a change in the size of a sector. The secondary sector witnessed a significant decline in manufacturing output particularly between 1973 and 1979. It fell even sharply during the period of recession. However the tertiary sector or the service sector output has been growing since 1964. The sector remained nearly immune even during the recessionary phase when only two of the subsectors were affected by the recessionary affects. This growth was particularly visible in the financial services, communication and real estate. The contrast growth pattern of the service and industrial sector changed their respective contribution in the national output. This rise in the share of service sector was mainly due to the fall in the share of the secondary sector. The financial service industry became the largest sector in terms of output. All this had a major influence on the employment levels in the two sectors. The employment in the manufacturing sector fell by nearly 5.8 million during the same period. Its share in the total employment fell more than three times to 11.8 percent in 2005. This was followed by an expansion in the employment level in the service sector by 23, 78,000. This growth was witnessed mainly in the financial service industry along with other scientific and professional services. This change was not confined to UK alone infact other industrial economies of the world were passing through the same phase (Pearson Education, n.d.). Causes of the shift- Stage of development The fall in the level of industrial activity can be partially explained by the growth of the service industry. But it is also argued that the growing unemployment led to an expansion of the service sector. The decline in the level of industrial employment was not due to economic development. This decline further accelerated during 1990s. As a result of economic development there is a change in the economic structure because of the change in demand pattern of the consumers. The mature economy leads to a shift towards the service sector and besides this the government impetus to the public services led to an overall growth of the service industry. It is also said that the country reluctantly specialized in industrial activity and with the expansion of the service sector it now specializes in an area where it has a comparative advantage. Competition from Low- wage countries As per the standards of a developed country, UK is a low-wage economy. The involvement of the third world countries in the export market is also one of the main reasons for the structural change in UK. The growth of the Asian economies in the export of manufactured goods led to a decline in the export activity of the country. North- Sea North-sea oil improved the BOP position of the country thereby increasing the demand for sterling. This resulted in higher exchange rate of sterling and this was further pushed up by the rise in the capital inflows which put an upward pressure on the domestic currency. This rise in the value of sterling made UK exports less attractive and the import became cheaper for the country. As a result the high pound brought about a decline in the industrial production and employment. Crowding-out In the views of Bacon and Eltis the reduced activity in the British industry was a result of it being crowded out by public services such as education and healthcare. The rapid rise in the public sector increased the tax burden of the businesses thus adversely impacting the industrial investment. So the growth of the public sector was responsible for the higher taxes and interest rates for financing public expenditure, reduced investment and inflationary pressures. It crowded out the industrial sector. The efforts of the government to reduce public spending and taxes after 1979 led to decline in the industrial activity and failed to reduce the tax burden. So the advanced economies all over the world faced a decline in the employment levels in manufacturing sector. But this is not a negative sign as it is but the natural outcome of an already developed economy. Source: (International Monetary Fund, 1997) The mature economy witnesses a stabilization of industrial output accompanied by a decline in the number of workers employed due to an increase in the level of productivity (International Monetary Fund, 1997). Dictates of modern markets for the business There are theories which suggest that the shift to the service industry is influenced by market demand. While the manufacturing industry like iron and steel is capable of strengthening the economic base of the country the service industry is the growing choice of the people. This could be due to the growing inclination of the people towards this sector. It is very often said that the industrial activity had already peaked and the level of growth was already high in this sector. This may also be because the industrial sector contributed towards highest total output whereas the share of the service industry was comparatively low. So it attracted labor in order to reach the output levels of the industry. Hence, it is basically a shift from the already developed sector to a developing sector. The service sector is characterized by diversified opportunities such as information technology, finance, and marketing. This restructuring has contributed to the inequality in the wage structure of the people. The average wage offered by the service industry is low and there exists a wide gap between the highest and lowest wage. There are numerous opportunities in the service industry (The Open University, n.d.). Besides this there are a number of high paying jobs in the service sector in comparison to the industries. The working pattern in today’s world has changed along with the nature of jobs. The working population today comprises of men as well as women. Moreover the nature of work has changed. Nowadays most of the work is done sitting in front of the computer be it the work of an engineer or a professional. A person employed as a cleaner is also seen as doing some small scale entrepreneurial work from home. The global economic integration has increased the mobility of labor. Many people migrate to the developed countries in the look-out for high paying jobs. They usually get employed in the low paid services thus increasing the service industry. The growing use of internet has broken the global barriers. This facilitates the faster transmission of information across the globe. The advanced level of communication has increased the impact of events in one part of the globe on fortunes of people in the other part of the world. The use of internet enables the organizations to save on the cost by using the time zones of different countries. For instance if a person wants to book airlines ticket at night using internet, the company can route the connection to some other time zone. By way of this the company saves on the cost of employing workers at night and also offers 24- hours of service. To match the working hours of different time zones many salaried people have to work at odd hours. The growing outsourcing industry has created various shift based jobs where the workers have to work according to the country whose job is being outsourced. This route has been adopted as firstly it helps the outsourcing company to cut down on its total costs as they mostly outsource their work to the developing countries where the wages are comparatively low. The technological advancement has reduced the unemployment levels from 6 percent to 4 percent. Besides this the changed stand of the government has opened up the economies thus developing the financial markets which were until now highly regulated by the government. The opening up of the closed economy has enabled these countries to establish trade-ties with the developed countries in the world. Before this the artistic work of the closed economies used to be confined to these regions only but with the growth of trading activities their artistic work has reached the developed countries. Nowadays there is an increased demand for such work as it improves the living condition in the developing countries by giving them a source of income. This has led many people to set-up their own small ventures. The skill of the local people is getting an international platform thus increasing the demand of their products. The development in the financial markets has created newer and complex jobs in the market which require specialized knowledge. Previously the financial market was limited solely to trading activities. But with the growth of complex financial products most of which are considered to be highly risky the need has emerged to employ highly skilled people who can help in a profitable use of such instruments. These jobs require an extensive financial acumen and are also highly paid. With the rinsing global exposure and a consequent currency risk many businesses employ these financial managers to safeguard against the financial risk. This has increased the demand of the services of these professionals. All this has made the service industry the highest contributor of the GDP of the country. The service industry in many of the advanced economies generates the highest level of employment. Even in developing countries like India where agriculture used to be an important sector the focus has shifted to the tertiary or the service sector. The service industry in the country employs the highest number of people followed by manufacturing and agriculture. This is partially explained by the integration of the financial markets with their global counterpart along with the growth in the IT industry. The salaried people today have lengthened working hours in order to meet their work commitment which has increased the pressure on the lifestyle of the people. It has also contributed to the inequality in the distribution of wealth in the society. So it can be seen that the improved levels of technology and the integration of the domestic markets with their global counterpart has resulted in a shift of the job pattern from the industries to the service sector. This shift has also been induced by the change in the nature of the jobs along with the inclusion of women in the workforce. Nowadays, women form an important part of the working population. They generally work in the education and health services sector that are considered as “soft jobs.” The economies all over the world follow this progression from agriculture towards the manufacturing such as steel production, ship-building etc. and in the end towards the service sector. UK was the first economy in the world to follow this progression and it was closely followed by the other economies of the world. With the improved levels of communication, rising mobility facilitating easy transportation of people and speed, the service sector now accounts for the highest employment levels. Conclusion The process of technological advancement is a very recent phenomenon that originated in the last five to six years but the shift from the industrial to the service sector started much before that. This indicates that the reason for this transmission is linked mainly with deindustrialization rather than dictated by the modern markets. The industrial activity had reached the saturated levels thus causing a spillover to the service sector. This can also be explained by the rise in the productivity levels even after the transition from the industrial to the service sector. As a result of the fall in the man-power the output of the manufacturing should have moved down but this in contrast moved up signifying an over absorbed workforce in the sector. While the total industrial output had already reached the highest levels the service sector was still in the nascent stage attracting the excess workforce of the industries. The output of the service sector was yet to match the levels of industry. There are theories suggesting that the shift towards the service sector was on account of its low productivity as compared to the industry (Kim, 2006). As the extra resources shifted from the industry to the tertiary or the service sector, the productivity of industrial output increased. The focus on the service industry increased further by the support of the government for the development of the non-market or the public services. For supporting its growth programs the government increased the taxes which reduced the investment in the industries. So, all these factors cumulatively led to a rise in the level of employment of the service industry. Reference Economics Help. No date. Deindustrialization in UK. Available at: http://www.economicshelp.org/dictionary/d/deindustrialisation.html [Accessed on December 1, 2009]. Pearson Education. No Date. Changes in the UK economic structure. Available at: http://vig.pearsoned.co.uk/catalog/uploads/Griffiths_C01.pdf [Accessed on December 1, 2009]. International Monetary Fund. 1997. Deindustrialization: Causes and Implications. Available at: http://www.imf.org/external/pubs/ft/wp/wp9742.pdf [Accessed on December 1, 2009]. The Open University. No Date. The shift from manufacturing to services in industrialized economies. Available at: http://openlearn.open.ac.uk/mod/resource/view.php?id=253845 [Accessed on December 1, 2009]. Center for Economic Policy Analysis. 1999. Deindustrialization and the Social and Economic Sustainability Nexus in Developing Countries: Cross-Country Evidence on Productivity and Employment. Available at: http://www.newschool.edu/cepa/publications/workingpapers/archive/cepa0110.pdf [Accessed on December 1, 2009]. Kim, H. 2006. The Shift to the Service Economy: Causes and Effects. Institute for Monetary and Economic Research The Bank of Korea. Available at: http://faculty.washington.edu/karyiu/confer/seoul06/papers/kim_hj.pdf [Accessed on December 1, 2009]. Read More