Sunday, October 14, 2007

If Manufacturing Creates a Middle Class, What Does a Service Economy Create?

Dani Rodrik thinks about the Chinese billionaires and has this insight:

I think because incomes from real estate are based on scarcity rents: you buy the right property at the right time, and you get rich very quick. No-one can dissipate your rents. But if you are in manufacturing, you have to compete not only with your international competitors, but also with copycats and imitators at home. So the rents from successful ideas get dissipated quickly. It's not that the overall gains are not large, and even larger than in successful property investments. It's that the innovators can hold on just to a small share. So real estate creates billionaires; manufacturing creates a middle class.

The U.S. is seeing its manufacturing sector decline as job creation seems to be in the service-producing sector rather than the goods producing-sector. This source notes the total nonfarm employment rose from 121.232 million in January 1997 to 138.265 million last month. But the goods-producing sector fell from 23.619 million in January 1997 to 22.324 million last month, while the service-producing sector saw employment rise from 97.613 million in January 1997 to 115.914 million last month. Over this period, we have also seen an increase in income inequality. When I think of the service economy, I think in terms of bimodal distributions:

Bimodality of the distribution in a sample is often a strong indication that the distribution of the variable in population is not normal. Bimodality of the distribution may provide important information about the nature of the investigated variable (i.e., the measured quality). For example, if the variable represents a reported preference or attitude, then bimodality may indicate a polarization of opinions. Often however, the bimodality may indicate that the sample is not homogenous and the observations come in fact from two or more "overlapping" distributions.

Some service sector jobs require few skills and have intense competition. Think of burger flippers and those who clean hotel rooms. Some service sector jobs require an advanced degree and have all sorts of barriers to entry. Think of doctors and lawyers. So how much of the increase in income inequality comes for the U.S. moving from a manufacturing economy to a service economy?


Econoclast said...

doesn't Microsoft count more as an example of manufacturing than one of real estate? But Bill Gates is but one of the MS billionaires. Rodric ignores the rents that can be received via intellectural property rights.

Bruce Webb said...

Rodric is being pretty facile here. Even land billionaires typical make their money by manufacturing, you can regard every building site as a factory. It is just that the factory transforms into the product.

You can make millions buying raw land and subdividing it for sale, to make billions you need to build stuff on it.

To answer pgl's question, I would say little of the income inequality has a sector explanation. Then again originally I was an historian and tend to view lots of things through the prism of power.

What I see is an environment where the managerial class has convinced themselves of the fundamental truth of the fictional Gordon Gecco. One you take 'Greed is Good' and make that a business norm, then people will take what they can when they can.

Then again I see a lot of activity due to tax cuts. It is a lot easier to justify an 8 or 9 digit salary if most of that is payed out as a capital gain and paying 15% tax than as income paying 50%.

So I think the whole thing is more of a temporal coincidence, with Reagan's tax cuts happening to come right at the outset of the Information Age and decline of the manufacturing sector.

Brian Dunbar said...

The U.S. is seeing its manufacturing sector decline as job creation seems to be in the service-producing sector rather than the goods producing-sector.

Employment is not the only way to measure the manufacturing sector. Earnings, productivity are also a factor.

I'm by no means an expert of course; but I work for an electronic manufacturing organization; 2/3 of our manufacturing capability is overseas (UK, Malaysia, Mexico and China), 2/3 of our revenue is generated by three facilities in the US. We're not a huge company, about mid-size for our sector.

These numbers fluctuate on a quarterly basis but have held steady for at least the last three years.

The same holds true for two other firms that I'm aware of in my town; one is a metal-working shop with global commitments, the other a foundry that makes large metal castings for domestic and overseas customers.

We're doing something right - even if the newspapers outside our area have not caught on.

Anonymous said...

I am not sure that the weakness in Rodrik's argument is crucial to PGL's argument. I have a weak conception of rent, especially in any microeconomic sense. However, PGL does have a point about the two very different kind of jobs in a service economy. But I am not sure where to go from there. What does it mean, why should I care that this type of inequality will mean for society? What are the chances that the newly superrich have some sense of fairness to bid up wages of the lower workers?

Shag from Brookline said...

Answer to the question: SERVITUDE!

Eleanor said...

Manufacturing jobs pay well due to unions, as far as I can see. Service jobs are largely ununionized. It's also possible that the profit margin is higher in manufacturing, meaning there is more to share with workers. Historically, manufacturing produced really rich people -- Carnegie, Frick and Morgan in steel, for example. Minnesota's own J.J. Hill in railroad building. What is meant by middle clas, anyway? I would not call James J. Hill middle class. Railroad workers are working class. The middle class used to be self-employed small business and professional people. I don't know who this article thinks they are.

Anonymous said...

You put your finger on something Eleanor, as it seems that even the term 'working class' has been largely disappeared in favor of 'we are all middle class now' types of platitudes, though I guess this began much earlier with postwar notions of partnership and having overcome class tensions.
But I'm an old fool who remembers Harlan Cty. and has yet to accept the perfecting of our social order.