The changing structure of the US workforce

The transition to services explains so much about our world today

Toilet computer

Here is an admittedly gross (but hopefully relatable, to some of you) admission: I’ve been taking my iPhone—aka the toilet computer—into the bathroom with me every morning for years. Doing my business takes just enough time to allow me to check emails and glance at the New York Times headlines (and scroll through Instagram or Twitter for a few minutes, depending on my recent fibre intake).

But in the spirit of New Year’s experimentation, I’ve been swapping the iPhone for books about stoic philosophy. I have two thoughts about this experiment so far.

First, it’s much easier to poop when you’re reading philosophy instead of alarmist NYT headlines. Second, the wisdom from two thousand years ago feels remarkably relevant today.

Reading stoic philosophy has reminded me that we spend so much time quacking at each other about what happened this week, or yesterday, or five seconds ago, and so little time pondering—ugh I don’t know—the eternal truths, the real wisdom, or whatever.

I’m no Marcus Aurelius, but today I want to share an insight that comes as close to economic wisdom as I have to offer. It’s helped me understand the world more clearly.

The insight: most people now work in services

This may not seem that insightful, but stick with me.

Today’s chart (above) shows that one hundred years ago, an American randomly plucked from a lineup of workers would as easily have been a farmer, as a factory worker, or a service-worker (say, a blacksmith). Today, there is an 80% chance that the random pluck would give you a service worker (likely a truck driver or a cashier, but also maybe a teacher, nurse, and slightly less probably, a lawyer or software developer).

The changes in the structure of the job market parallel the evolution of what the US economy produces. Consider the example of IBM: as its name—International Business Machines—suggests, the company started out manufacturing mainframe computers. But these days IBM makes far more money selling services, like IT strategy consulting, than it does selling hardware.

And this is not just happening in the US—every rich country has made a similar transition. In Germany, 79% of the workforce is in services. In Japan, it’s 81%. In Canada, it’s 93%.

There are three reasons for fewer farming and factory workers and more service workers:

1. We replaced American farmers and factory workers with robots and workers in China and elsewhere. Service jobs, on the other hand, are not as vulnerable to automation, and can’t easily be offshored (your hair salon can’t operate from China).

2. Women entered the workforce, pushing formerly unrecognized services done within the home into the marketplace—and creating more (service) jobs for home cleaners and food service workers, amongst others.

3. As the country has grown wealthier, people have been spending a little bit more on the stuff that factories make (like cars), but a lot more on services like education and healthcare.

The transition to services helps explain…

Income inequality

As manufacturing has declined, so have unions. Their decline is widely seen as an important driver of growing inequality.

Also: income dispersion has always been higher within services than in manufacturing. Jobs that require scarce, high-skills—like medicine, law, finance, and tech—have always earned much more than service jobs which require skills which are more abundant (truck drivers, cashiers, receptionists, etc.).

As the service sector expands, a greater portion of the US workforce is subject to its tendency towards income inequality.

The cost of education

There are many explanations for the rising cost of college education: administrative bloat, an amenity arms race, and the difficulty of boosting productivity in education (I wrote about this last factor here).

But a widely under-reported cause, I think, is simply that education is an investment in human capital and—because of the transition to services—the returns on that investment have soared. In fact, by my rough calculations, since the additional income gained from a college education (versus high school) is rising faster than the cost of tuition, one might say college is getting cheaper!

The urban/rural divide

Hillary Clinton lost the election but later said, “I won the places that represent two-thirds of America's gross domestic product.” She was right—and those places are disproportionately urban and not rural (check out this fascinating map of voting patterns in 2020).

The transition to services helps explain this: in a service economy, highly skilled workers gravitate to cities, where they earn high wages and drive the bulk of economic growth. Highly skilled workers are also highly educated—and education correlates with a sort of ur-trait: openness. Openness correlates with opinions about everything from immigration to abstract art—and the propensity to vote Democrat. This is just one channel amongst many that link the rise of services to the increasingly stark political division we see in America, not least on geographic lines.

What’s past is prologue

The problem is not services itself, since our economy is exponentially wealthier than the manufacturing economy our grandparents grew up in. The problem, I think, is that the acquisition of the human capital needed to participate in the services economy is being limited to so few.

Marcus Aurelius said: “Look back over the past, with its changing empires that rose and fell, and you can foresee the future too.” One of the reasons the Roman empire fell was growing inequality between the gold-rich elite and a cash-poor peasantry.

Is education today’s gold?

Further reading:

• Marcus Aurelius’ Meditations

• The best—and most readable—analysis of polarization in the US is Ezra Klein’s book Why we’re polarized. I highly recommend it.