Download How does politics affect state`s capacities to manage the adjustment

The political economy of the post-industrial age
- a research agenda
Dr. Anne Wren
Senior Research Fellow
Institute for International Integration Studies
Trinity College Dublin
Director, EU- Marie Curie Excellence Project in Political Economy
(POLGLOBALSERV)
Email: [email protected]
Table of Contents
Page
Section 1
Introduction
3
Document Outline
4
The shift to services: A Long Run Perspective and its 4
Limitations
Section 2
Theoretical Framework and Research Areas
9
Section 2.1
International Trade in Services, and the Supply and Demand for 9
Skills
2.1 (a)
The Demand for Skills in International Service Markets
9
2.1 (b)
Politics and The Supply of Skills for International Service 14
Markets
Section 2.2
Inequality and Service Sector Expansion
17
2.2 (a)
Inequality and Employment in Non-dynamic (Handicraft) 19
Service Sectors
2.2 (b)
Inequality and Dynamic Service Sector Expansion
21
Section 2.3
Demand and Service Sector Expansion
23
2.3 (a)
Aggregate Demand, Consumer Demand, and Service Sector 23
Expansion
2.3 (b)
Female Labor Force Participation, Consumer Demand and 25
Service Sector Expansion
Section 3
Three alternative models of the political economy of the service 30
transition
3.1
The Liberal Market Economy Route
31
3.2
Two Coordinated Market Economy Routes – Social democratic 32
and Christian democratic
3.3
Some Political Implications
35
Section 4
Conclusions
37
2
Introduction
Advanced capitalist democracies have become significantly more oriented towards
service sectors in recent decades. This sectoral shift in the locus of economic activity
resembles in magnitude the earlier “great transformation” from agriculture to industry,
and poses a major challenge to the field of comparative political economy. The challenge
arises because virtually all of our political economic models of advanced industrial
democracies are based on our knowledge of the functioning and economic logic of the
manufacturing sector. To the extent that these models neglect important differences
which exist between manufacturing and services in terms of production processes,
productivity levels, and exposure to trade, they are incapable of providing accurate
predictions of the economic and distributional effects of policy choices in economies
which are increasingly service based. Equally, they are limited in their ability to
understand the strains which this economic transformation places on existing political
coalitions.
Our project focuses directly on the political management of the transition to a service
economy. We investigate how politics affects the capacities of states to manage the
adjustment process. To analyse this, we need first to understand how alternative strategies
for the economic development of the service economy differ in distributional terms. We
then need to investigate how states “choose” between these strategies. Is the choice of an
economic development strategy for a service economy constrained by the structure of
existing socio-economic institutions and policies ? If so, how ? What are the primary
political and institutional obstacles to reform ? And what are the implications for politics
of the pursuit of alternative development paths ?
3
Document outline
Section I provides a long-term economic perspective on the transition from
manufacturing to services. It then identifies a set of theoretical and empirical questions
which cannot be addressed within this framework, and which form the research agenda of
this project. Section 2 assembles a theoretical framework for our analysis. In it, we
identify a set of three core areas where we believe further research is necessary to help us
to build a more complete model political economic model of the service economy
transition. Section 3 posits three alternative models of the political economy of the
service transition. Section 4 concludes.
Section I : The shift to services: A Long-run Perspective and
Its Limitations
The size of the shift from manufacturing to service sectors in advanced industrial
democracies in recent decades can be easily illustrated by considering the trends in
employment and output shown in Tables 1a and 1b. From Table 1a, we can see that the
service sector accounted for something close to half of employment in most OECD
countries in 19701. By 2003, this figure had risen in all countries to at least two thirds,
while in most countries more than three quarters of employment was located in service
sectors. Over the same period the share of value added in services sectors has also
increased, albeit by a lesser amount, so that by 2003 services accounted for at least twothirds of output2.
<<Table 1a and 1b here>>
1
2
The most notable exceptions being Canada and the US at 61 and 68 per cent respectively.
The exceptions here are Ireland and Norway at 56 and 62 per cent respectively.
4
William Baumol (1967, 2007) provides us with a useful theoretical framework for
understanding these long-run trends. His work emphasizes the significance of what he
labels the “handicraft” attributes of certain services, which stem from their basis in face
to face interaction. A key claim is that high rates of productivity growth are difficult to
achieve in these kinds of services, as the quality of the service is likely to decline if less
time is provided. Good examples to think through here are waitressing and childcare.
While technological change (for example, the introduction of computers) may allow
marginal improvements in productivity in these sectors, it is hard to think of substantial
increases in “output” per head (meals served, children supervised) occurring without a
decline in the quality of the service. At the very least, any increase is likely to be small
when compared with the large-scale improvements in productivity engendered, for
example, by technological change and Fordist innovations in industrial production
processes.
Baumol argues that the relative price of “handicraft” services can be expected to increase
over time as a result of their technological stagnancy. In progressive sectors, which are
characterized by relatively high rates of productivity growth, wages can increase without
an accompanying increase in costs and prices. In stagnant sectors, by contrast, wage
increases will translate directly into increases in costs and prices. Since, in the long run,
wages across sectors tend to increase together, the result should be an increase in the
relative price of services in stagnant sectors over time.
Under certain important assumptions about the structure of output (that the share of
stagnant service sectors in overall economic output remains constant, or increases, over
time), Baumol’s model implies that the share of employment in these sectors will
increase over time also. This result is straightforward. Given constant output shares
between two sectors in a two-sector economy, an increase in productivity in one, without
an accompanying increase in the other, will lead to a shift in employment to the less
productive sector.
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The continued relevance of Baumol’s hypothesis is underscored by the data in the Table
2. The table shows average productivity growth rates in the 1990s in a range of service
sectors in the OECD.
<<<Table 2 here.>>>
We can see that the set of service sectors with important “handicraft” components Hotels and Restaurants, Education, Health, and Community, Social and Personal
Services; and Public Administration and Defence – continued to experience low or
negative rates of productivity growth in the 1990s. In line with Baumol’s argument, the
share of employment in these sectors has also increased steadily over time, so that, by
2003, they accounted collectively for just over a third of employment, on average, in
OECD countries.
Significantly, however, the table also contains data on productivity growth in a range of
service sectors where the face-to-face component of provision is less important –
financial intermediation, post and telecommunications, wholesale and retail trade,
transport and storage. In these sectors rates of productivity growth have been relatively
high, in some cases outstripping those observed in manufacturing sectors over this period.
Many of these “non-handicraft” sectors – for example, financial and business services
and communications – have experienced productivity enhancing technological change
associated with the revolutions in information and computer technology over the past two
decades. Unsurprisingly perhaps, given their lower levels of dependence on face-to-face
interaction, these are also the sectors in which service trade has expanded most rapidly in
recent decades, facilitated again by the revolutions in IT and communications technology
which have enabled both the digitization of information and its low cost and
instantaneous transport worldwide.
Like their “handicraft” counterparts, this more dynamic group of service sectors have also
increased their share of employment steadily over time, again accounting for just over
one-third of employment on average in OECD countries in 2003. In fact, the data in
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Table 3 indicates that in many OECD countries, employment is more concentrated in
dynamic, than in handicraft or non-dynamic service sectors.
<< Table 3 here >>
This table shows the shares of dynamic service sectors, non-dynamic service sectors, and
total services, in employment in a range of OECD countries in 2003. There are several
points of interest here. First, we can see that both the dynamic and non-dynamic service
sectors are extremely important in terms of employment in all countries. Dynamic sectors
accounted for between twenty-eight and forty-two per cent of total employment in 2003,
while non-dynamic sectors accounted for between thirty and forty-three percent. Second,
there is interesting variation in cross-national sub-sectoral employment patterns. In one
set of countries, employment is more concentrated (in some cases significantly so) in
non-dynamic sectors. This group includes the Scandinavian social democratic welfare
states, the US, and two Mediterranean countries – Spain and Portugal. By contrast, in the
remaining Liberal Market Economies (Australia, Canada, the United Kingdom, and New
Zealand), along with the Netherlands, employment is significantly more concentrated in
the dynamic service sector. Two additional Coordinated Market Economies – Austria and
Germany - also show a concentration of employment in dynamic service sectors, albeit
slightly weaker. In the remaining set of countries – Belgium, France, Italy, Greece and
Ireland – employment is very close to evenly divided between the two groups.
This observation of the significance of both dynamic and non-dynamic service sectors in
OECD labor markets is the starting point for this project. We need to know, first of all,
what explains variations in employment performance and in cross-national concentrations
of employment between dynamic and non-dynamic service sectors in the short to medium
run. These are questions which Baumol’s long-run model is not equipped to address. We
believe, however that understanding these patterns is critical to the development of a
political economic model of the service economy transition. In the project we ask
whether a varieties of capitalism approach can help us to understand this variation ? Can
we identify specific institutional configurations which support alternative patterns of
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service sector expansion ? What is the cross-sectoral impact of alternative institutional
configurations ? Do institutions which promote expansion in one set of service subsectors favour or block expansion in others ?
Our second, related question, concerns the distributional correlates of alternative
development paths. Why is service sector expansion accompanied in some countries by
increases in inequality – in others not ? Why is expansion in non-dynamic service sectors
concentrated in some countries in the public sector – in others not ? How does service
sector expansion affect the relative demand for different types of labor market skills ?Are
certain patterns of service sector expansion more likely to be associated with increased
labor market polarization than others ? Again, adopting a cross-sectoral approach, we
want to ask whether the pursuit of particular strategies for development in “dynamic”
service sectors associated with specific distributional outcomes in non-dynamic, or
“handicraft” sectors, and vice-versa ?
Finally, and critically in terms of understanding the political economy of the service
sector transition, we ask what are the political implications of alternative development
paths ? If they have diverging distributional implications, what, if any, is the likely
impact of this on patterns of political coalition formation ? And based on this analysis can
we identify political factors which might obstruct the pursuit of certain development
paths, or equally favor others ?
Two questions are key here. First, how are labor market opportunities distributed across
different skill groups under alternative models of service sector development ? Does the
transition to services imply increased diversity in workers’ interests and increased
political conflict between skilled workers and their semi and unskilled counterparts ? If
this is true it would add weight to Iversen’s (2007) hypothesis that “the politics of class”
in a post-industrial context is more likely to center on conflicts between workers than on
traditional cleavages pitting the interests of a unified working class against their capitalist
counterparts. Alternatively, does the potential for the formation of political coalitions
between workers at different skills levels – a central feature of the Fordist political
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economy – still exist in a service economy context, implying a continued unity of
working class interest ? Second, for a variety of reasons, service sector expansion has
been closely associated with the expansion of female labor force participation. What is
the political impact of this change ? In particular, how might we expect gender based
cleavages to interact with cleavages based on skill levels and sectoral location in different
institutional contexts ?
Clearly this is a large research agenda, and we will not be able to answer all of the
questions which are raised here. We identify below, however, a set of three core areas
where we believe further research is necessary to help us begin to address these questions
and, in so doing, to build a more complete model of the political economy of the service
economy transition. In each area we discuss what we see as the key theoretical issues,
before identifying a set of important research questions. Much of this discussion is
conducted with reference to the literature on Varieties of Capitalism (Hall and Soskice,
2001) which provides us with a useful theoretical framework for understanding the
capacity of the institutions of a political economy to adapt to new economic challenges.
The areas of interest which we identify are:
1. International Trade in Services and the Supply and Demand for Skills in Service
Sector Markets
2. Inequality and Service Sector Expansion
3. Consumer Demand, Female Participation, and Service Sector Expansion
Section 2: Theoretical framework and Research Areas
Section 2.1 International Trade in Services and the Supply and Demand for
Skills in Service Sector Markets.
2.1 (a) The Demand for Skills in International Service Sector Markets
Most service sectors have long been considered, almost by definition, to be non-tradable
internationally. Since services could not be easily stored or transported – basically
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because their provision required a degree of interpersonal interaction – they were also
difficult to trade. One way around this constraint for producers wishing to compete in
foreign service markets was via FDI – i.e. by the establishment of a commercial presence
abroad. However, attempts to do so were limited by the existence of significant barriers
to FDI in many areas of services. Since the 1980s, two significant changes have occurred
which have resulted in a substantial expansion in trade in services worldwide. First, the
revolutions in IT and communications technology which have enabled both the
digitization of information and its low cost and instantaneous transport worldwide have
largely removed many of the technical constraints on trade at least in the more
information-intensive areas of service provision. In addition, since the mid-1980s,
significant initiatives have taken place to liberalize services trade and FDI. As a result of
these developments, there has been a substantial expansion in services trade worldwide
since the mid-1980s. Although it remains small compared with goods trade, trade in
services has doubled since the mid-1980s (See Figure 1).
Unsurprisingly, service sector trade has been concentrated in the dynamic sectors. While
physical barriers to trade exist in handicraft sectors, in sectors which depend less on faceto-face interaction, these barriers are absent. Trade in areas like finance and business
services and telecommunications in particular have been facilitated by the revolutions in
IT and communications technology which have enabled both the digitization of
information and its low cost and instantaneous transport worldwide3.
The opening up of international service markets clearly offers considerable opportunities
for expansion in dynamic service sectors to those who can compete. But what factors
enable them to do so ? In their volume on Varieties of Capitalism, Hall and Soskice
(2001) describe how the institutional configuration of a political economy influences its
3
While the revolutions in information and communications technology are by far the most significant
shocks to the cost of service sector trade, it is worth noting that reductions in transport costs, and in
particular in the costs of flight, also have an impact on the internationalization of services. Of particular
interest is that these changes also reduce the costs of the international provision of services in areas where
personal interaction is important e.g. Western Europeans traveling to Eastern Europe (or South Africa) for
medical and dental work; students traveling to Western European countries or to the US for educational
purposes etc. .
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ability to compete in international markets. One of their core arguments is that
coordinated and liberal market economies were equally equipped to meet the challenge of
globalization in the 1980s and 1990s, but in different ways. The institutional
characteristics of coordinated market economies (CMEs) which facilitate long term
relationships between employers, workers, and financial institutions give these economies
a comparative advantage in certain industrial sectors based on a highly specialized and
skilled labor force, and a capacity for incremental innovation. Liberal market economies
(LMEs), on the other hand, where relationships tend to be market based, and more fluid
in nature, are argued to compete most effectively in areas requiring strong high level
general skills and a capacity for radical innovation. The key point is that both institutional
configurations allow effective competition in international markets. Increased openness,
therefore, should not create an incentive for cross-national institutional convergence, but
rather continued divergence along alternative equilibrium paths.
What can this general framework tell us about the capacity of a political economy to
adapt to expand in dynamic internationally traded service sectors in particular ? Hall and
Soskice argue that the incremental innovation facilitated by the institutional configuration
of CMEs is most effective in maintaining competitiveness in the production of capital
goods, where the problem is “to maintain the quality of an established product line, to
devise incremental improvements to it that attract consumer loyalty, and to secure
continuous improvements in the production process in order to improve quality control
and hold down costs” (p.39). On the other hand, a capacity for radical innovation is
important in order to compete in the provision of complex system based products and
services where “competitiveness demands a capacity for taking risks on new product
strategies and for the rapid implementation of such strategies within large, tightly coupled
organizations that employ diverse personnel” – included in this list would be most highend knowledge intensive service sectors.
In this approach, comparative advantages in production stem from the interaction of a
dense network of institutions related to finance, industrial relations, the welfare state,
education and training. One critically important determinant of an economy’s capacity to
11
compete, however, is its skill profile. It is uncontroversial that the causal relationship
between skill endowments and patterns of comparative advantage in production is an
important one. In service economies, which are often described as “knowledge based” in
recognition of the informational component of high-end service production and trade, we
might expect it, if anything, to be even more so.
In the area of skills, Hall and Soskice’s argument suggests that countries possessing
strong high level general skills (the typical pattern for LMEs) are particularly well-placed
to compete in high-end knowledge intensive service sectors (e.g. finance and business
services). On the other hand, the high levels of industry and firm specific technical skills
created by firm and industry based vocational training in CMEs would appear to be badly
matched with the needs of global service markets. In general, therefore, we might expect
LMEs to be better equipped to compete internationally in services.
The data in Table 3, however, gives no indication that the CMEs as a group have been
less successful than their LME counterparts at creating employment in dynamic service
sectors. Moreover, the data in Table 4 suggests that some CMEs have been relatively
successful in developing comparative advantage in dynamic service sectors. The table
contains on revealed comparative advantage by service category in a range of OECD
countries. A value of greater than one on this index, indicates that the country is
specialized in exporting this category of services; a value of less than one indicates that it
is non-specialized. The data shows that, as we might expect, international markets for
finance and insurance do appear to be dominated by LMEs, with Ireland and the UK
showing a strong comparative advantage in both sectors, while the US and Canada show
advantages in finance and insurance respectively. In the remaining two ‘dynamic’ service
sectors – communications, and computer and information services – however, both LMEs
and CMEs perform well. Amongst the CMEs, Finland, Sweden and the Netherlands
display a comparative advantage in both of these sectors, accompanied by France and
Belgium in the area of communications, and Germany in the area of computers and IT.
Amongst the LMEs, Canada performs well in both sectors, while Ireland and the UK
show a concentration in computers and IT.
12
<<<Table 4 here: Comparative Advantage >>>
The data suggests, therefore, that a more nuanced understanding of the determinants of
comparative advantage in production for global service markets is required. What allows
some, but not all, CMEs to compete in some dynamic service sectors, but not others ?
Clearly there are multiple determinants of comparative advantage in trade – including
infrastructure (and, most especially in the case of knowledge-intensive services, IT
infrastructure), natural resources, and geography. Nevertheless a key component, from a
varieties of capitalism perspective, remains the skill composition of the workforce, and its
effect on capacities for innovation and hence, competition4.
So what types of skills are required in order to allow a political economy to compete
effectively in the global services marketplace ? We know that strong high-end general
skills acquired through high quality tertiary education have been an important component
of the economic success of LMEs. They have certainly contributed to these countries’
performance in high end business services and in finance, for example. On other hand,
Iversen and Stephens (2007) find evidence that these systems may not perform so well at
producing strong general skills at the lower end of the distribution. Their analysis of data
from the OECD/Statistics Canada Literacy Test shows that at the bottom end of the
population distribution, average literacy scores in a sub-set of coordinated market
economies – that is the social democratic welfare states, along with the Netherlands,
Belgium and Germany – significantly outstrip those recorded in LMEs. Interestingly, this
grouping is very similar to the set of countries which show higher concentrations of
exports in communications and IT. The match is not exact. Denmark and Norway, which
perform equally well in terms of general skills at the low end, have not shown particular
strength in these sectors5. However, the relationship is intriguing. Does it imply that a
skill profile emphasizing relatively strong general skills amongst less skilled workers
4
Another important component of Hall and Soskice’s argument emphasizes the importance of financial
institutions in explaining patterns of innovation. For the purposes of clarity, we choose to leave this aspect
of the institutional configuration of a political economy aside in the current discussion.
5
In the case of France, which also performs well in communications, there is no data available from the
OECD literacy survey on educational outcomes.
13
might equip countries for an effective export strategy in certain dynamic service sectors ?
Alternatively, do the education and training systems of some CMEs provide workers with
technical skills which are sufficiently general (i.e. transferable across firms and sectors)
as to form the basis for competition in dynamic service sectors ?
Clearly, there are important questions which need to be addressed here about the
relationship between institutions, patterns of skill formation, and comparative advantages
in production in dynamic service sectors. What types of skills are needed to compete
internationally in dynamic service sector markets ? Which types of education and training
systems are good at providing these skills ? Associated with these issues are two
important political questions. First, if reforms in educational and training systems are
necessary to allow countries to compete effectively in international service markets, then
what, if any, are the principal political and institutional obstacles to reform ? We discuss
this issue in more detail below. Second, what might the impact of shifts in the demand for
skills associated with the increased importance of international service markets be on
patterns of political coalition formation ? This question is closely linked with issues
surrounding the relationship between inequality and service sector expansion which we
will discuss in more detail in Section 2.2.
Section 2.1 (b) Politics and The Supply of Skills for International Service Markets.
From the preceding discussion it seems likely that, at a minimum, three possible routes
towards the development of a skills-based comparative advantage in services may exist.
The first two routes focus on increased investment in tertiary education, in order to allow
specialization in high-end services requiring strong higher level general skills (for
example in finance and high-end business services or in education). Tertiary education
can be financed either publicly or privately. The private sector route is best exemplified
by the US case, although levels of private spending on tertiary education are significantly
higher across the LMEs. Its effectiveness rests in part on the existence of significant skill
or qualification based wage differentials which offer inducements to private individuals
to invest in higher education (as well as to make private investments in preparatory
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education at the secondary level to increase the chances of acceptance to elite schools6).
The pursuit of the private sector route to tertiary expansion, therefore, may imply
sacrifices in terms of the equality of labor market outcomes.
The alternative, public sector, route to financing tertiary education clearly does not
depend on the provision of individual incentives for investment. As described by Ansell
(2007), however, the costs of financing higher education often force governments to
make difficult trade-offs between public subsidization and expansion of access. Ansell
argues that publicly financed expansions are likely to be particularly politically costly for
governments of the Left, as long as they continue to be seen as transfers to the middleclass (that is, until “invisible” barriers to access for the children of blue-collar workers
can be successfully removed). For the same reasons, publicly financed expansions are
likely to be favored by center-Right governments who stand to gain from increasing
transfers to this constituency.
In addition, the discussion in the preceding section suggests the possible existence of a
third route towards the development of comparative advantage in services, which is
focussed on investment in strong general skills amongst less skilled workers. Iversen and
Stephens identify several possible factors contributing to the relatively strong general
skills observed at this level in some CMEs. In the Scandinavian cases it is likely that
public spending at the pre-primary (day-care) level plays a role. The potentially
egalitarian impact of investment at this level has already been suggested by evidence that
it reduces the correlation between parents and children’s educational levels (EspingAndersen, 2002). Additionally, however, Iversen and Stephens find a close association
with levels of spending on active labor market policy and vocational educational
attendance, which could explain the relatively strong low-level general skills observed in
the Dutch and German cases (where public investment in pre-primary education is
relatively low). Their interpretation of this result is the following. Relatively strong
general skills at the lower level are a pre-requisite for successful vocational training.
6
See The Sutton Trust “University Admissions by Individual Schools” (2007) for data on the relationship
between private school education and admission to elite universities in the UK.
15
Where vocational training systems can guarantee good jobs for workers without tertiary
education, therefore, the incentives for young people to invest in lower level general
skills are stronger. In LMEs, by contrast, the “winner takes all” nature of a system which
provides excellent job opportunities for workers in possession of tertiary qualifications,
and poor job opportunities for those without them, creates little incentive for those who
are unlikely to attend third level to work hard to acquire strong general skills.
Iversen and Stephens’ argument suggests that vocational training systems have affected
patterns of skill formation in coordinated market economies in two ways. The first effect
is a direct one. Firm and industry level vocational training schemes facilitate the
formation of the firm and industry specific mid to high level technical skills required by
employers specializing in well established industrial products. The second effect is an
indirect one. Since investment by individuals in firm and industry based vocational
training has been associated in these systems with relatively well paid and stable
employment opportunities, and since strong low end general skills facilitate successful
participation in vocational training schemes, strong incentives exist for workers at the
lower end of the skills distribution to acquire these skills.
It is unclear, however, how well these systems are designed to cope with the challenges
of adaptation to a service economy. In particular, firm and/or industry based vocational
training systems appear ill-equipped to provide the skills necessary for a country to
compete in dynamic service sectors, where comparative advantages in production tend to
be based on strong general and transferable skills. Furthermore, where the ability of the
vocational training system to guarantee relatively highly paid employment opportunities
comes into question, the indirect effect of vocational training systems in providing
incentives to invest in low-end general skills will also be weakened. The implications of
this are not so significant where low-end general skill formation is also supported by
heavy investment in early childhood education (for example in Scandinavia). Where
alternative policies to support general skill formation are absent, however (for example in
Germany) they are likely to be more serious.
16
In cases where a mismatch develops between the skills provided by national education
and training regimes and the demands of the global economy, we would expect to see
pressure for educational reform. If vocational training systems cannot be adapted to meet
these demands, countries which have previously relied on these systems may face new
political choices about the expansion of access and financing of general education.
On the issue of education, skill formation, and the transition to a service based economy,
therefore, there are several important issues which need to be addressed. How are
different education and training systems coping with the adjustment to a service based
economy ? What types of skills are different systems good at providing and how do these
relate to patterns of comparative advantage in trade in dynamic service sectors ? Are
certain systems, for example those which have formerly relied heavily on manufacturing
based firm and sector specific vocational training systems, ill-equipped to provide the
skills necessary to compete in international service markets ? Are these systems
experiencing significant pressure for reform, and, if so, what direction has reform taken ?
Does the shift to a service based economy imply a need for increasing emphasis on
general education (either at the high or low end of the scale), and if so, what methods of
financing this strategy are politically feasible ? More generally, what types of political
coalitions might we expect to form around alternative educational strategies in this
changing economic context ?
Section 2.2: Inequality and Service Sector Expansion.
A related set of issues concerns the relationship between wage equality and employment
expansion in service economies. A central question here is whether it is possible to create
the kinds of low to semi-skilled jobs in high productivity sectors which formed the core
of the Fordist production process, and which allowed employment expansion to be
combined with wage equality, in the “golden age” of industrial expansion in the 1950s
and 1960s. Does de-industrialization imply the loss of these jobs and an associated
increase in labor market polarization, with workers increasingly concentrated at opposing
high-skilled and high paid, and un-skilled and low paid poles ? Or does a more egalitarian
17
distribution, with a core of workers concentrated in relatively well-paid semi-skilled jobs
remain a possibility ?
In an earlier context of dynamic industrial expansion, the well-known Rehn-Meidner
model (favoured by Swedish social democrats in the post-war period) showed how
egalitarian wage policies could have positive effects on private sector employment
growth (Meidner, 1974; Rehn, 1985). Rehn and Meidner’s argument runs as follows. In
the “golden age” of industrial expansion price and income elasticities of demand for a
range of new consumable manufactures were high. Additionally the capacity for
productivity increases in these sectors was high (as a result of technological advances,
Fordist innovations, and the exploitation of economies of scale). The model showed how
the existence of egalitarian wage policies/institutions in this type of environment could
have positive effects on employment. Egalitarian wage policies/institutions linked the
wages of workers in less and more productive sectors. This had the effect of raising the
wages of workers in less productive sectors out of line with productivity, while
restraining the wages of workers in more productive sectors
Given highly price and income elastic demand, the labor-saving effects of productivity
increases in the dynamic sectors of the economy were compensated for by expansions in
demand (resulting from falling prices and rising real wages) so that the net effect on
employment in these sectors was positive. Egalitarian wage policies also had the effect of
restraining real wages in more productive sectors, with additional positive effects on
demand. At the less productive end of the market meanwhile, relatively high wages
forced businesses either to innovate to increase productivity or to fail – but the overall
impact on the economy was simply a shift in resources towards the more dynamic
sectors. This was facilitated by an active labor market policy which ensured constant
retraining of workers to assist their transition from declining to expanding sectors.
This process of dynamic expansion was associated in particular with increased demand
for less skilled workers in highly productive manufacturing sectors. Increases in relative
demand in turn had the effect of enhancing the political bargaining power of less skilled
18
workers and facilitated the negotiation of a set of unified working class interests,
allowing, amongst other things, the negotiation of centralized wage bargains with positive
effects on wage equality.
It remains to be seen whether this experience can be replicated in a service economy
context. We need to know what are the implications for equality, and for the unity of
workers’ interests more generally, of the service transition. In part, the answers to these
questions will hinge on whether service expansion is associated with the creation of
employment opportunities for less-skilled workers in dynamic traded service sectors, or
whether such employment becomes concentrated in non-dynamic sheltered sectors.
Section 2.2 (a) Inequality and the Expansion of Employment in Non-dynamic Service
Sectors.
In a range of non-dynamic service sectors, and in particular in personal services, demand
is relatively price and income elastic. This is unsurprising given the feasibility of home
production of these services (e.g. cleaning, gardening, waitressing) (Kongsrud and
Wanner, OECD 2005). As discussed earlier, however, the capacity for productivity
increases in these “handicraft” based sectors is low. Under this set of conditions, the
effect of egalitarian labour market institutions on employment will be the opposite of that
predicted by Rehn-Meidner. That is, we should expect to see a negative correlation
between equality and private service employment creation in these sectors. Since the
scope for productivity increases in these sectors remains low, employment expansion
depends on relatively low labor costs which allow price elasticities of demand to be
exploited. Egalitarian wage-setting institutions, however, tend to keep wages in these
sectors relatively high. They thus have the effect of constraining employment expansion.
In line with this argument, Iversen and Wren (1998) show that the egalitarian wagesetting institutions found in CMEs, have tended to be associated with stagnancy in
employment creation in non-dynamic private service sectors. In the social democratic
welfare states, this shortfall has been compensated for by expansion in public services. In
19
Christian democratic welfare states, in a context of de-industrialization, it is more likely
to be associated with unemployment or non-employment. The LMEs, in contrast,
combine high levels of inequality in wage setting with high levels of employment
expansion in non-dynamic private service sectors7.
In that article we describe this particular set of policy trade-offs associated with the
expansion of employment in non-dynamic service sectors as a “trilemma”, or three way
choice. Institutions promoting wage equality tend to inhibit the goal of private
employment expansion in non-dynamic service sectors. Where service employment
expansion depends on expansion in non-dynamic service sectors, therefore, governments
face three choices. They can opt to prioritize employment expansion in these sectors by
allowing an increase in flexibility in wage setting and in wage inequality (the Liberal
route). Alternatively they can opt to continue to promote equality in wage setting and
either (a) sacrifice the goal of employment in non-dynamic service sectors (the Christian
democratic route) or (b) compensate for the shortfall in private employment in nondynamic service sectors through public sector expansion (the social democratic route).
Whichever route is chosen, one of three potential policy goals must be sacrificed –
equality under the Liberal route; employment under the Christian democratic route; and
fiscal restraint (or low levels of government spending and taxation) under the social
democratic route. Hence governments face a “trilemma” or three way trade-off between
these policy goals.
Where the transition to a service based economy implies an increasing concentration of
low-skilled employment opportunities in non-dynamic sheltered service sectors, we
therefore expect to see increasing diversity in the political economic interests of high and
low skilled workers. Where expansion occurs in private non-dynamic service sectors (the
typical LME route) we might expect this to be reflected in growing tension over income
7
A considerable number of studies have investigated the relationship between equality and employment
expansion in employment in general, and in employment in non-dynamic service sectors in particular.
Recent critical reviews by Gregory et al (2007); Kenworthy (2007); and Bassinini and Duval (2006)
question both the tightness of the trade-off between equality and employment creation, and its importance.
All of these authors concede, however, that some evidence of trade-off does exist.
20
inequality between high and low-skilled workers; where it occurs in public services, (the
more traditional social democratic route), between low-skilled workers in sheltered
service sectors and their more skilled counterparts in internationally exposed sectors over
issues of competitiveness and taxation; where employment in these sectors is
institutionally constrained (as in Christian democratic regimes), between skilled labor
market “insiders” and unskilled “outsiders” facing higher rates of unemployment.
Section 2.2 (b) Inequality and Dynamic Service Sector Expansion
It is unclear, however, whether the concentration of employment opportunities for less
skilled workers in non-dynamic sheltered sectors is an inevitable consequence of the
transition to a service based economy. Some coordinated market economies in fact
combine relatively high levels of wage equality with strong general skills amongst less
skilled workers, and with the development of comparative advantage in certain
“dynamic” service sectors, as we discussed in Section 2.1. This raises the question as to
whether a Rehn-Meidner style expansion is possible in a service economy, with
implications for equality, and for patterns of political coalition formation amongst
workers.
We know that not all service sectors are technologically stagnant. As described in Section
1. the logic of Baumol’s argument about the limits on the capacity of productivity growth
in services applies most directly in the area of personal services. However, in many other
areas of service production – including communications, ICT, financial and business
services and communications - the capacity for productivity enhancing technological
change has proved much greater, as illustrated by the data on productivity growth rates in
Table 2. In particular, these sectors have been well placed to benefit from the revolutions
in information and computer technology over the last few decades.
In tandem with rising rates of productivity, the last couple of decades have witnessed
significant expansions in the size of dynamic service sector markets. This effect has
occurred in part as a result of the development of, and growing demand for, new service
21
products - in areas such as marketing, finance, business consulting, and e-commerce for
example. Of equal, or perhaps more significance, however, has been the opening up of
service sectors to international trade as described in Section 2.1.
Access to new and relatively unsaturated markets for service outputs yields an
opportunity for a strategy based on high-end service expansion to those who can
compete. Where expansions in demand for high-end products are sufficient to
compensate for the labor-saving effects of productivity increases in dynamic sectors, it
should be possible for the worst effects of Baumol’s “cost disease” to be avoided. It will
be recalled that where the output shares of dynamic service sectors are increasing, a
critical assumption of the basic Baumol model is violated, so that the model’s prediction
of an inevitable shift in employment towards more stagnant sectors no longer applies.
Under these conditions, moreover, it can be plausibly argued, that the old Rehn-Meidner
model might still apply in a service sector context. That is, egalitarian wage policies,
while choking off demand in more stagnant sectors, may simply have the effect of
shifting resources towards the more dynamic sectors, where demand is increasing.
The actual economic effectiveness, as well as the distributional implications, of the
pursuit of such a strategy, however, will be heavily dependent on issues related to the
demand for and supply of skills in the labor market. In terms of effectiveness, the critical
issue is whether the educational and training systems are equipped to provide the types of
skills necessary to compete in global service markets. In distributional terms, the key
questions are the following. Does the potential for dynamic expansion exist only in
sectors employing relatively high-skilled workers (implying that the egalitarian effects of
the Rehn-Meidner model will be undermined) ? Or might it indeed be possible to identify
service sectors which are characterized by expanding demand and high rates of
productivity growth amongst less-skilled workers, allowing high levels of wage equality
to be combined with the expansion of employment in these sectors ?
The expansion of employment opportunities for less skilled workers in high productivity
export oriented service sectors would imply a reduction in the distributional tensions
22
associated with Iversen and Wren’s trilemma. It would also act to preserve a unity of
interest between low and high skilled workers which could form the basis for continued
political coalition formation across skill groups.
Section 2.3. Demand Side arguments for Service Sector Expansion
The discussion so far has largely skirted the issue of the relationship between demand and
patterns of service sector expansion. This is the final set of questions to which we turn
here. What role, if any, do aggregate demand, and in particular consumer demand play in
explaining patterns of service sector expansion ? Can specific patterns of demand for
services be related to the institutions of the political economy ? If so, what are the
distributional and political implications of these relationships ? In this section and the
next we consider the implications of two rather different sets of demand side arguments.
The first concerns the impact of alternative demand management regimes in different
institutional contexts. The second focuses specifically on the impact of female labor force
participation on the expansion of demand for market services.
Section 2.3 (a). Aggregate Demand, Consumer Demand, and Service Sector Expansion
Soskice (2007) emphasizes the role of demand in accounting for variations in
unemployment rates between LMEs and the larger CMEs in the 1990s. His argument
stems from the observation that demand management regimes tend to be more
conservative in CMEs. Decisions to shift towards more conservative regime types in
these countries 1980s can be linked with changes in production regimes in this period.
However, Soskice argues, these changes have left the larger CMEs, in particular, illequipped to respond to aggregate demand shocks. In an open economy context, where the
possibility of multiple unemployment equilibria exists, some discretion may be required,
at least in fiscal policy, to prevent shocks to aggregate demand from raising the
equilibrium unemployment rate. In LMEs, where this flexibility exists, governments have
been able to respond to demand shocks with fiscal expansions, thus allowing the real
exchange rate to rise, but reducing the equilibrium unemployment rate. In contrast, in
23
CMEs, the risk is that in the absence of tools for fiscal expansion the outcome instead
will be lower real exchange rates but high unemployment.
This risk is intensified where policy responses to the initial demand shock generate
knock-on effects in suppressing domestic consumer demand. Soskice identifies two
institutional channels through which these effects may be transmitted. The first relates to
the structure of wage bargaining. Where export sector unions play a lead role in the wage
bargaining process, and where they respond to the situation by restraining real wages, the
potential exists for the negative effect on domestic consumption to outweigh any positive
effects associated with competitiveness gains. Where this occurs the shock to
unemployment will be amplified. Clearly this mechanism is most important in large
economies, where a relatively large component of consumption demand is generated
domestically.
The second effect links consumer behaviour with the institutions of education and
training and the welfare state. Soskice argues that in an atmosphere of economic
uncertainty, employees with specific skills will be more risk averse in their spending
behaviour. Faced with a higher probability of prolonged unemployment associated with
job loss than workers with general skills (which are more easily transferred to new firms
or sectors), they will choose to self-insure through saving. The higher savings ratios, and
lower consumption growth, observed in many European CMEs in the 1990s may
therefore be directly linked with the skill composition of the labor force in these
countries.
In addition, the effects of skill-specificity on consumption behaviour will be greater when
the size of an economic shock is sufficient to call the future of the welfare state in these
systems into doubt. Where traditional guarantors of worker income in times of economic
downturn, such as early retirement programs, are threatened, the negative effect on
workers’ expected income will induce further precautionary savings, and reductions in
consumption. Again, the overall effect will be an amplification of the original aggregate
demand shock.
24
Soskice’s arguments concern the capacity of the economy as a whole to adjust to
unexpected demand shocks. It will be important to consider, however, what, if any, the
implications of these arguments might be for our understanding of the service economy
transition. One significant point here is that the link between patterns of consumer
demand and the expansion of non-dynamic service sectors is a particularly close one. An
alternative to Baumol’s explanation for the long run trend towards expansion in
“handicraft” service sectors over time is that many of these services are luxury items,
occupying a greater share of consumption as incomes rise (Fuchs, 1968). There is
certainly evidence to suggest that demand for a range of personal services is income
elastic8. Where a shock to aggregate demand reduces the income available for
consumption by either (a) inducing real wage restraint, or (b) by increasing savings rates,
as predicted by Soskice in the large open CME cases, therefore, we would expect to see a
disproportionately depressing effect on demand for personal services. Does Soskice’s
argument suggest therefore, that patterns of consumer behaviour in specific skills regimes
are likely to inhibit the expansion of personal services ? - especially given the size of the
economic adjustment implied by the service economy transition, and associated high
levels of uncertainty about the direction of future reforms.
Section 2.3 (b). Consumer Demand, Female Labor Force Participation and Service
Sector Expansion.
In a similar vein, Gregory et al (2007) point out that the “employment gap” which has
grown between the US and the EU over the last thirty years has been closely associated
with a gap in the growth of consumer demand per head of the population between the two
continents over the same period, and in particular is linked with an expansion in demand
in non-dynamic service sectors. However, these authors identify labor force participation
rates as the principal causal factor underlying this variation.
8
See Kongsrud and Wanner (OECD 2005) for evidence on this.
25
It is well known that Americans devote significantly more time to market work than
Europeans. Rates of female participation in the labor market, and average hours worked
per year by men and women alike, are now higher in the US than Europe. Gregory et al
(2007) argue that much of the US-European service employment “gap” can be explained
by this variation and its impact on patterns of consumption. Their argument is that
increased labor market participation increases demand for market services via an income
effect and also a substitution effect.
The income effect works as follows. Since productivity rates per hour worked are
currently relatively similar in Europe and the US, higher rates of labor market
participation in the US (in terms of numbers participating and also average hours worked)
result in higher per capita GDP. Since demand for a range of personal services is income
elastic, therefore, we would expect this difference to be reflected in higher levels of
demand for personal services in the US. Again this explanation fits with Fuchs’ argument
that personal services are luxury items, occupying a greater share of consumption as
incomes rise (Fuchs, 1968).
Richard Freeman, in the same volume, however, emphasizes a different effect of
increased labor market participation. He points out that increased labor market
participation tends to be associated with a substitution away from home to market
production of certain personal services – like cooking, cleaning and child-care. This
effect is not inevitable: individuals could choose to compensate for increased time spent
working in the market by reducing leisure time. Empirical evidence from time use
surveys, however, suggests that in fact substitution effects of this type are rather
significant, particularly amongst female workers, who have traditionally been more
closely involved in household production9. In effect, therefore, Freeman argues that we
9
The argument that increased labor market participation increases the demand for market services applies
not only to personal services, but also other types of services which are provided to individuals and
households rather than firms. Longer hours worked in the market imply and increased demand from the
provision of other services outside regular trading hours (for example, retail services). In turn this increases
the demand for employment in these sectors (e.g. store opening hours increase, increasing the number of
store employees needed in a twenty-four hour period). In this case employment expands not as the result of
a substitution effect of market for home production, but rather as a result of an increase in service sector
labor intensity.
26
are observing two different equilibria: a “marketized” equilibrium in which female
participation rates and demand for and supply of “low-end” market services are high; and
a “non-marketized” equilibrium characterized by low rates of female participation, low
levels of employment in “low-end” market services, and high rates of household service
production. These equilibria are typified by the US and German cases respectively.
What are less well understood, however, are the institutional configurations underlying
these equilibria. There is little doubt that the institutions of the welfare state play a
prominent role in inhibiting or encouraging labor market participation. Some authors
argue that most of the variation in participation rates between the US and Europe can be
explained by variations in incentives stemming from the taxation system (Prescott, 2004).
Certainly the impact of tax individualization on female participation rates is well known
(Callan ?). Meanwhile, it has been argued that inequity of access to education and health
services in the US creates a two income “trap”. The divergence in the quality of public
schools between wealthier and poorer districts, creates incentives for mothers to
participate in the labor market in order to afford housing in wealthier neighbourhoods
(Warren and Tyagi (2003)). Similarly, the high costs of medical insurance, and the
minimal coverage provided in the public system in the US create incentives for women to
participate in order to avail of employment based insurance schemes. In contrast, in
Scandinavian systems, the welfare state plays a more positive role in facilitating female
participation in the labor market by means of publicly provided day-care facilities. In
both LMEs and CMEs, meanwhile, female participation has been facilitated by new
forms of flexibility in working-time arrangements.
Also of importance, however, are the institutions of wage-setting and of education and
training. In order to estimate the net benefits of market participation, women must
compare the benefits of participation (their own market wage), with the costs of paying
on the market for services which they could provide themselves. As we know, the costs
of these “handicraft” services are principally determined by the wages paid to workers in
these sectors. Where these wages are relatively high, therefore, the incentive for women
27
to participate will be lower. This implies that, ceteris paribus, in egalitarian wage-setting
systems the incentives for women to participate should be lower.
It also implies that, in systems where wage-setting institutions are more flexible (so that
workers at different points in the skill distribution are paid wages more closely in line
with their skill levels), female participation rates will be influenced by the distribution of
skills. Where skills are unequally distributed – that is with greater concentrations at the
top and bottom of the skill distribution than the center – and where significant numbers of
women are located in the high-skill group, therefore, we would expect rates of
participation amongst high-skilled female workers to be higher than where skills are more
concentrated in the center of the distribution (as the net benefit of participation for
relatively high-skilled female workers will be higher in the first case). In turn, higher
participation amongst high-skilled women should induce higher levels of demand for less
skilled workers in personal service sectors10.
To this extent, the education and training system will also have an important role to play.
In the US case, inequity of access to education is associated with a highly inequitable
distribution of skills. Combined with a highly flexible wage-setting system this results in
high levels of wage inequality, which have the effect of encouraging female participation
at the high end of the labor market, with an associated increase in demand at the low end,
and supports the “marketized” equilibrium identified by Freeman. In Scandinavia,
publicly provided day-care increases the net benefit of participation for women, without
relying on market based inequality as an incentive. Although if Freeman’s hypotheses
about marketization are correct, we would expect this to be reflected in an expansion in
demand for personal services in sectors which are not dominated by public provision (for
example, in catering and cleaning). The absence of such an expansion in the
Scandinavian cases can only serve to re-emphasise the importance of low-cost
competition and the inhibiting effect of wage equality on expansion in these sectors. In
10
In systems where skill levels amongst women in general are low (i.e. where women are concentrated at
the lower end of the skill distribution), the incentives for women to participate will also be low. This is not
the case in most OECD countries today, where female education rates tend to equal or surpass those of
males.
28
Germany and the Netherlands, meanwhile, neither public childcare provision, nor wage
inequalities exist to provide an incentive for female participation. In recent years
participation has been encouraged in these systems, however, by increased flexibility in
working-time arrangements and higher levels of part-time work. Since the increase in
household income, and the decrease in available time for household chores, associated
with the addition of a second family earner who works part-time is likely to be less than
that for a full-time work, however, it seems reasonable to predict that the expansionary
effect on demand for personal services in the marketplace would also be less.
It is clear that patterns of female participation and service sector expansion are closely
linked. We need to understand more about this relationship and its distributional and
political implications. Important research questions here include the following. What is
the relationship between the institutional configuration of the political economy, patterns
of labor market participation, and the demand for market services ? What are the
distributional implications of these relationships ?
And what are their political
implications ? How does the increase in female participation associated with the service
sector transition impact on patterns of political coalition formation in post-industrial
societies ? In particular, how might we expect gender based cleavages to interact with
cleavages based on skill levels and sectoral location in different institutional contexts ?
Of course, these are very broad questions. And indeed some of them are too broad to be
addressed in the context of this project. Our goal, however, is to analyze certain core
components of the political economy of the feminization of labor markets as they relate
to the institutional and political management of the service economy transition. In the
next section, we introduce some ways of thinking about these issues and their relationship
with the service economy transition process more specifically.
29
Section 3: Three Alternative Models of the Political Economy
of the Service Transition
The discussion in this paper has highlighted some of the ways in which socio-economic
institutions interact to produce distinct patterns of service expansion at the sub-sectoral
level. In each section we have identified an area where the service economy transition is
likely to imply significant adjustment (and possible political change). We have outlined
what we know about the relationships between the institutional configuration of the
political economy and economic and distributional outcomes, and about the political
implications of change, in each of these areas. In each area also this discussion has
highlighted a set of open research questions - some broad, some more specific - of
relevance in deepening our understanding of the political economy of the transition
process.
In this section we tie these strands together to posit three alternative models of the service
economy transition. This discussion is preliminary in nature and is intended to illustrate
the ways in which we see our avenues of inquiry interacting. The categorizations which
we present here are far from definitive. Rather, we see as one of the goals of the project
the revision and updating of these models to allow us to move beyond existing
classifications.
At a first approach, based on the discussion in this paper, however, it is possible to
distinguish three routes to service sector development which correspond with the three
well-known welfare state-production regime “types” – Liberal (LME); Coordinated and
Social Democratic (CME-SD); and Coordinated and Christian Democratic (CME-CD). In
what follows we summarize the principal institutional, distributional, and political
characteristics of each.
30
Section 3.1: The Liberal Market Economy Route
The first route which we identify is the “Liberal” or LME route – best typified by the US
case. Here strong private investment in tertiary education creates excellent general skills
at the high end of the skill distribution. Countries with this skill profile are well placed to
compete in certain dynamic knowledge-intensive service sectors such as finance and
insurance (as we can see from the data on comparative advantages in service trade
presented in Table 4). The economic effectiveness of this educational system, however,
rests in part on the existence of significant skill or qualification based wage differentials
which offer inducements to private individuals to invest in higher education (as well as to
make private investments in preparatory education at the secondary level to increase the
chances of acceptance to elite schools). As Iversen and Stephens point out, in a “winner
takes all” system in which workers without tertiary qualifications tend to be condemned
to low-paid work, the incentives to work hard amongst those who are likely to achieve
third level qualifications are strong; amongst those whose prospects are not so good, on
the other hand, the incentive to acquire strong general skills is much weaker.
This institutional configuration may be effective in facilitating the acquisition of the
strong high-end general skills necessary for a country to compete internationally in
dynamic service sectors such as finance and insurance. However it also has significant
implications for patterns of expansion in non-dynamic or “low-end” service sectors.
Significant inequalities in the distribution of labor market skills, combined with
flexibility in wage setting procedures which allow low cost competition in private
personal service provision, increase the incentives for more women to enter the labor
market (as long as some women are included in the high-skilled group)11. In turn this
creates an expansion in demand for personal services provided in the market, and in (lowwage) employment in these sectors.
11
This effect is increased further when access to key welfare state services such as education and healthcare
is inequitable.
31
The first two rows of Table 5, summarize some of these characteristics of the LME route
to service sector expansion in the UK and US cases. Low levels of investment in skills at
the low end to middle of the skills distribution (evidenced by low rates of vocational
education attendance and low rates of public spending on child-care), result in poor
outcomes on general skills at this level (evidenced by low scores at the 5th percentile in
the OECD literacy test), and are associated with high rates of wage inequality (d9d1
ratios). At the same time, this institutional configuration is associated with a comparative
advantage in dynamic service sectors – most especially finance and insurance. This
combination of high end opportunities and low cost competition at the low end of the
service market, induces high rates of female participation, and an expansion in market
employment in personal services (last column) 12.
Section 3.2: Two Coordinated Market Economy Routes – Social democratic
and Christian democratic
In contrast, some CMEs seem to manage to combine high rates of wage equality with the
development of comparative advantage in certain dynamic service sectors. As we can see
from Table 5, high rates of wage equality in Germany, the Netherlands, Finland and
Sweden are associated with comparative advantages in trade in communications and IT,
but not in finance and insurance. These characteristics are also associated with a more
equal distribution of general skills in the labor market. In particular, as we can see from
the third column in the table, they are associated with higher levels of skills at the lower
end of the skill distribution than their LME counterparts. It remains to be seen whether a
direct causal relationship can be established between this skill profile and the ability to
compete in certain dynamic service sectors. If such a relationship does exist, however, it
suggests the possibility of a service expansion strategy combining high rates of wage
12
We include data on the catering sector in particular here as it is unlikely to be affected by international
variations in the public-private mix in service provision which makes some data on personal service
provision hard to interpret except at a highly disaggregated level. It thus constitutes a purer test of
Freeman’s marketization hypothesis.
32
equality with the expansion of low to medium skill level employment in productive
service sectors.
Within the coordinated market economy grouping, however, as we might expect, the
social democratic and Christian democratic regimes diverge from each other in two key
respects. The first of these relates to the supply of skills for service sector markets; the
second to patterns of female labor force participation. There is some evidence to suggest
that the divergence which exists in these two areas is related. It may also have
implications for the economic sustainability, as well as the political effect, of the service
sector development paths pursued in these countries.
The Supply of Skills in SD-CME and CD-CME Regimes
In terms of skill provision, the principal difference between SD-CMEs and CD-CMEs is
the following. While less skilled workers appear to possess relatively strong general skills
in both types of regime, the route by which this skill profile is achieved differs between
the two. In both cases, it has been suggested that the vocational training system plays an
important role in the development of high levels of general skills at the low end of the
skills distribution. The empirical relationship between the two is illustrated in Table 5,
columns 1 and 3. As argued by Iversen and Stephens, this may be because the vocational
training system itself has acted as a guarantor of relatively well paid employment
opportunities for workers without tertiary qualifications, which, in turn, provides
incentives for workers lower down the skill distribution to work hard, in the process
acquiring relatively strong general skills. For this logic to continue to apply, however,
vocational training systems need to continue to be seen as a bridge to well paid
employment in the context of a global service market. And, as we have discussed, this
may constitute a challenge for some firm and industry based systems.
This problem is likely be felt less acutely in social democratic cases where the
development of strong low to middle range general skills is also promoted by high levels
of public investment in early childhood education, or childcare (See Table 5, Column 2).
33
In the Christian democratic cases, however, where such investment is absent, more
substantial reform of the education and training systems may be required.
Female Labor Force Participation in SD-CME and CD-CME Regimes
High levels of investment in childcare also have the effect of increasing the net benefit of
labor market participation for women in Scandinavian welfare states. They do so by
substantially reducing the costs of participation without reliance on market based
inequities. Of course this pattern is also associated with a more general trend in these
societies for non-dynamic service employment to be concentrated in the public sector. In
the Christian democratic cases, in contrast, female participation is not supported by
public childcare spending. Additionally, relatively egalitarian earnings distributions, and
the existence of significant barriers to low end competition in service provision,
substantially reduce the net benefits to high-skilled women of participating in the labor
market. On the other hand participation has been facilitated in these countries by
increased flexibility in working-time arrangements, with greater numbers of women
participating in the labor market on a part-time basis (See Table 5, Column 5).
The implications of these developments for the “marketization” of personal services are
not completely clear. Interestingly there is little evidence that high rates of (full-time)
labor market participation of women in social democratic countries have been associated
with an increased “marketization” in service provision even in areas where public
provision is insignificant (e.g. in catering) (See Table 5, Column 8). This observation
provides some support for the hypothesis that barriers to low-cost competition also act as
a significant inhibitor of employment expansion in these sectors: in other words that
trade-offs between equality and private employment creation in non-dynamic service
sectors may be hard to avoid.
In Christian democratic cases were public service sector expansion is institutionally and
politically constrained, we might expect to see increased levels of “marketization” across
a broader range of personal services, associated with increasing levels of female
34
participation. On the other hand, as in the social democratic cases, the expansion of
demand for market provided personal services in these countries is likely to be
constrained by obstacles which exist to low cost competition in provision. It will also be
limited by the fact that large numbers of women work part-time. Since the increase in
household income, and the decrease in available time for household chores, associated
with the addition of a second family earner who works part-time are likely to be less than
that for a full-time work, the size of both the income and substitution effects on demand
for personal services will also be reduced.
Section 3.3 Some Political Implications
LMEs
Politically, the LME route seems the most likely to be associated with an increasing
divergence of interest between low and high-skilled workers. Employment opportunities
are concentrated at two distinct labor market poles: at the top end of the market jobs are
highly paid and highly skilled, and are more likely to occur in exposed sectors – at the
bottom wages and skill levels are low and jobs are concentrated in sheltered sectors. In
the absence of relatively highly paid employment opportunities for less skilled workers in
more productive and internationally traded service sectors, there is little likelihood of
bridging this gap. Moreover, since the expansion of employment in non-dynamic
personal services in these cases is also closely associated with high rates of labor market
participation by highly skilled (and highly paid) women, this cleavage is likely to be
reinforced at the household level (since the skill levels of domestic partners tend to be
highly correlated).
Social-democratic-CMEs
Among others, Esping-Andersen (1990, 1996) argues that the predominant cleavage in
social democratic welfare states is likely to be that between (sheltered) public and
(exposed) private sector workers, although the evidence so far of the empirical salience of
35
this cleavage is not strong. Our discussion of the service economy transition suggests the
importance of two additional factors which may impact on the salience of the publicprivate cleavage. First, the cleavage is likely to be reinforced where it coincides with a
skills-based divide: that is, where social democratic regimes are unsuccessful in creating
employment opportunities for less skilled workers in dynamic exposed service sectors, so
that less-skilled employment opportunities become concentrated in sheltered public
sectors. In this situation we might expect a clear divergence of interests between highskilled workers in internationally competitive service sectors and their less-skilled
counterparts enjoying relatively well-paid and sheltered employment in the public sector.
On the other hand, if social democratic regimes are successful in creating relatively well
paid employment opportunities for less-skilled workers in highly productive export
oriented service sectors, skills based cleavages will instead cross-cut those between
exposed and sheltered workers, with potentially less divisive results.
Similarly, the gender basis of the public-private sector divide is often noted by
commentators: female workers have tended to be concentrated in sheltered public service
sectors; males in exposed, typically industrial, sectors. Whether this gender based
cleavage continues to reinforce the public-private sector divide in increasingly services
based economies remains to be seen, however, since expansion in all areas of services
including dynamic export oriented sectors like finance and communications, has been
associated with significantly higher rates of female employment13. As the economic
importance of export oriented service sectors increases, therefore, the continued
concentration of female employment in sheltered sectors can no longer be assumed14.
Christian-democratic-CMEs
13
While rates of female employment in sheltered service sectors are particularly high – typically at least
seventy-five percent in most Wester European countries – rates of female employment in dynamic service
sectors are also high – averaging something close to fifty per cent compared with thirty per cent or less in
manufacturing (EU-LFS Survey 2006).
14
For the purposes of clarity I am omitting here the important debate as to whether the concentration of
female employment in sheltered public service sectors ever did in fact serve to reinforce political cleavages
between workers in exposed and sheltered sectors. A plausible alternative argument contends that the
opposite is true. That is, that gender segregation of this type in fact reduces the likelihood of significant
political cleavages developing along these lines because it has the effect of diversifying households’ labor
market assets across the public and private sectors (Pierson, 2000).
36
Finally, for Christian democratic CMEs it is commonly predicted (again stemming from
the work of Esping-Andersen (1990, 1996)) that de-industrialization will be associated
with increasingly salient political cleavages between labor market “insiders” and
“outsiders”. Labor market regulations designed to protect the wages and working
conditions of a privileged core of industrial workers tend to inhibit expansion in nondynamic private service sectors, while inherited Christian democratic welfare state
structures inhibit large scale expansions in state service provision and public service
employment. As a result, the argument goes, as de-industrialization proceeds, the
starkness of the distributional and political divide between core industrial workers who
retain their jobs and a growing class of unemployed and non-employed workers can be
expected to increase.
Again, our discussion of the service economy transition raises issues which may have an
important bearing on these arguments. First, if it is possible for CD-CMEs to develop the
ability to compete in global service sector markets – and, in particular, if they can
develop a comparative advantage in sectors which are highly productive but which rely
on less skilled labor as suggested above - then the likelihood of the development of a
politically salient insider outsider cleavage is reduced. The expansion of employment
opportunities for less skilled workers at relatively high wages should constrain the ranks
of the unemployed and non-employed and serve to protect the unity of workers’ interests.
As we noted, however, this outcome is likely to depend critically on the capacity of the
education and training systems in these countries to adjust to meet the needs of the
service economy. Second, high rates of female employment in all areas of services and an
associated increase in voluntary part-time employment, suggest the possibility of a more
fundamental re-alignment of worker interests in these countries, and the need for a radical
reconceptualization of the concept of a labor market “outsider”.
Section 4: Conclusions
37
At the beginning of this paper, we made an analytical distinction between two sets of
service sub-sectors. Dynamic sectors – including, among others, finance, business
services, and telecommunications - are characterized by high rates of productivity
growth, and are increasingly internationally traded. In contrast, handicraft sectors –
including hotels and restaurants and a range of personal and social services - are
characterized by low rates of productivity growth and are relatively sheltered from
international trade. The economic significance of both types of sector, especially in terms
of employment creation, but also in terms of value added, has increased considerably in
recent decades. Together, they currently account for more than two-thirds of employment
in most advanced industrial democracies. Individually, each occupies a greater share of
employment than the manufacturing and agricultural sectors combined.
As we have described in the paper, however, the expansion of employment in different
service sub-sectors can have very different distributional implications. As a result, the
political characteristics of the service economy transition process will vary significantly
depending on the composition of employment expansion.
Empirically, significant cross-national variation exists in terms of the rate of service
sector expansion, its composition at the sub-sectoral level, and its distributional
correlates. The goal of our project is first of all to understand the role of the institutional
configuration of the political economy in explaining this variation; second to investigate
its distributional and political implications. In the paper we have identified a set of areas
for research which are central to the investigation of these issues. This set of research
topics forms the core of our research agenda on the political economy of the postindustrial age.
38
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40
TABLE 1(A): CHANGING SHARES of TOTAL EMPLOYMENT in
DIFFERENT ECONOMIC SECTORS, 18 OECD COUNTRIES
AUSTRALIA
AUSTRIA
BELGIUM
CANADA
DENMARK
FINLAND
FRANCE
GERMANY
IRELAND
ITALY
JAPAN
NETHERLANDS
NEW ZEALAND
NORWAY
SPAIN
SWEDEN
UNITED KINGDOM
UNITED STATES
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
1970
8.0%
24.5%
5.9%
31.2%
54.6%
6.2%
22.9%
60.8%
10.9%
25.9%
53.1%
21.2%
23.1%
45.2%
14.0%
25.5%
50.0%
8.6%
35.8%
44.9%
27.0%
20.2%
20.5%
27.6%
40.9%
19.9%
26.0%
44.7%
6.1%
25.2%
57.9%
13.0%
23.2%
54.8%
7.3%
26.5%
55.8%
2.7%
22.6%
68.0%
1980
6.6%
19.7%
62.6%
19.8%
22.9%
48.6%
3.8%
23.6%
64.0%
4.5%
19.1%
66.7%
7.8%
20.3%
63.9%
13.2%
24.7%
53.1%
8.8%
23.6%
58.2%
5.3%
31.3%
53.6%
18.3%
21.1%
49.7%
13.4%
29.1%
48.6%
12.9%
23.1%
52.7%
5.0%
19.6%
66.1%
8.4%
19.3%
63.3%
16.9%
23.2%
49.4%
4.7%
22.8%
64.5%
2.4%
24.8%
63.1%
2.3%
19.3%
71.3%
1990
5.6%
14.7%
69.7%
16.7%
19.9%
55.5%
3.1%
19.7%
70.8%
4.1%
15.6%
71.2%
5.5%
19.3%
68.6%
8.6%
20.3%
61.3%
5.9%
19.2%
66.7%
3.6%
28.4%
59.7%
15.1%
19.4%
56.7%
7.5%
24.6%
60.2%
8.8%
23.2%
57.4%
4.4%
17.0%
71.4%
0.6%
20.5%
71.7%
6.1%
14.3%
70.8%
10.5%
19.7%
58.9%
3.3%
19.4%
69.9%
2.2%
17.9%
70.5%
1.8%
15.1%
76.5%
2003
4.8%*
11.9%*
74.0%*
13.0%
15.5%
64.2%
2.4%
14.7%
76.6%
2.7%
13.5%
75.6%
3.7%
15.4%
74.2%
5.2%
18.7%
68.7%
4.1%†
15.2%†
73.9%†
2.4%
20.2%
70.4%
6.6%
15.6%
65.8%
4.4%
21.5%
66.5%
6.0%
17.4%
66.0%
3.3%
12.4%
77.7%
0.7%
16.1%
76.8%
3.6%
11.9%
76.7%
5.7%
17.2%
65.3%
2.4%
16.4%
74.9%
1.4%
12.2%
79.0%
1.7%
10.8%
80.9%
Source: OECD STAN Database *2001 Figure †2002 Figure
41
TABLE (B):CHANGING SHARES of ECONOMIC VALUE ADDED in
DIFFERENT ECONOMIC SECTORS, 18 OECD COUNTRIES
AUSTRALIA
AUSTRIA
BELGIUM
CANADA
DENMARK
FINLAND
FRANCE
GERMANY
IRELAND
ITALY
JAPAN
NETHERLANDS
NEW ZEALAND
NORWAY
SPAIN
SWEDEN
UNITED KINGDOM
UNITED STATES
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
Agriculture
Manufacturing
Services
1970
7.3%
23.3%
54.2%
4.1%
29.3%
53.4%
4.6%
21.2%
60.5%
6.1%
20.2%
62.8%
11.4%
25.9%
50.2%
7.5%
28.8%
54.3%
3.3%
36.6%
48.3%
8.6%
28.3%
51.3%
5.9%
33.7%
49.9%
5.8%
25.2%
57.3%
5.8%
21.0%
62.6%
5.4%
26.2%
57.8%
3.0%
32.0%
53.7%
2.6%
23.4%
65.5%
1980
6.7%
18.2%
58.2%
5.7%
23.7%
58.1%
2.5%
22.9%
62.1%
4.3%
18.5%
58.9%
5.3%
18.9%
67.5%
8.7%
27.5%
53.1%
4.6%
25.8%
60.8%
2.0%
31.2%
56.5%
5.9%
29.5%
55.6%
3.5%
27.1%
56.9%
3.9%
18.4%
62.6%
10.1%
21.7%
59.2%
4.1%
15.8%
57.0%
7.2%
26.5%
55.6%
4.2%
22.0%
63.9%
2.2%
26.2%
56.0%
2.2%
20.6%
67.0%
1990
3.8%
13.6%
67.1%
4.0%
21.4%
64.2%
2.2%
22.5%
66.6%
2.9%
16.9%
66.1%
4.2%
17.3%
70.4%
6.3%
22.4%
60.6%
3.7%
20.4%
67.9%
1.5%
29.3%
60.8%
9.2%
26.6%
55.4%
3.4%
23.5%
64.4%
2.4%
25.9%
58.7%
4.4%
18.9%
65.7%
6.7%
18.0%
66.5%
3.4%
12.5%
62.7%
5.3%
20.8%
61.4%
3.3%
20.4%
66.2%
1.8%
22.4%
64.2%
1.7%
17.2%
72.9%
2003
3.8%*
11.7%*
70.6%*
2.0%
19.9%
67.5%
1.3%
17.4%
74.0%
2.2%*
18.3%*
66.6%*
2.2%
15.3%
72.6%
3.4%
22.6%
66.2%
2.6%
16.8%
73.6%
1.1%
22.2%
70.2%
2.7%
31.2%
56.2%
2.5%
18.9%
70.8%
1.2%
20.0%
68.6%
2.4%
14.4%
73.0%
9.2%*
16.1%*
66.6%*
1.5%
9.7%
61.9%
3.2%
16.2%
68.5%
1.8%
19.9%
70.8%
1.0%
14.2%
75.0%
1.0%
13.8%
77.4%
Source: OECD STAN Database *2001 Figure
42
Table 2: Rates of Productivity Growth, 1990-2001
(Services and Manufacturing)
Sector
Productivity Growth
(Average, 1990-2001)
Whole Economy
2.5
Total Services
1.2
Handicraft Sectors
Hotels and Restaurants
-0.3
Education
0.1
Health
0.1
Other Community and Social Services
Public Administration and Defence
-0.2
1.2
Non-Handicraft Sectors
Financial Intermediation
Post and Telecommunications
4.5
10.0
Wholesale and Retail Trade
2.5
Transport and Storage
2.5
Total Manufacturing
3.7
Machinery and Equipment
5.0
43
Table 3: Employment Shares in Service Sub-Sectors
(19 OECD Countries, 2001-2003)
Dynamic Services
as % of
Total Employment
Non-Dynamic
Services
as % of
Total Employment
Services
as % of
Total
Employment
Dynamic
Concentration
Australia
Canada
Netherlands
New Zealand
United Kingdom
Austria
Germany
41.3%
40.8%
41.1%
41.6%
42.4%
34.0%
36.4%
32.7%
34.8%
36.6%
35.2%
36.6%
30.2%
33.9%
74.0%
75.6%
77.7%
76.8%
79.0%
64.2%
70.4%
Non-Dynamic
Concentration
Norway
Sweden
United States
Finland
Denmark
Portugal
Spain
35.2%
33.3%
38.2%
31.8%
35.5%
28.0%
31.5%
41.5%
41.6%
42.7%
36.9%
38.7%
32.4%
33.9%
76.7%
74.9%
80.9%
68.7%
74.2%
60.3%
65.3%
Evenly Distributed
Belgium
France
Ireland
Italy
Greece
38.5%
37.0%
33.0%
33.7%
31.3%
38.2%
37.0%
32.8%
32.8%
29.9%
76.6%
74.1%
65.8%
66.5%
61.2%
Average
36.0%
35.7%
71.7%
Country
44
Table 4: Revealed Comparative Advantage
(By Service Sector, 2004)
Communications
IT
Insurance
Finance
Canada
1.8
1.4
2.3
0.4
Ireland
0.9
8.7
6.3
1.4
UK
1.0
1.4
2.1
2.3
US
0.7
0.6
0.6
1.2
Belgium
2.0
1.0
0.5
0.8
Germany
1.1
1.4
0.8
0.6
France
1.3
0.3
0.4
0.2
Neth
2.2
1.2
0.2
0.2
Denmark
0.6
0.6
0.4
0.2
Finland
1.6
1.9
0.2
0.2
Norway
0.6
0.5
0.4
0.4
Sweden
1.5
1.6
0.5
0.5
Source: OECD. Revealed Comparative Advantage Calculation: Export share of a
product (or category of services) of the total exports (of services) of a country divided
by the export share of this product (or category of services) of the region or the world
(here: OECD). If the RCA takes a value less than 1 this implies that the country is not
specialised in exporting the product (category of services). The share of that category
of services within the total exports of services of this country is less than the
corresponding OECD share. Similarly if the index exceeds 1 this implies that the
country is specialised in exporting this category of services.
45
Table 5: Characteristics of Regime Types
Comm
IT
Ins
Fin
3.47
1
1.4
2.1
2.3
Employment
in Catering
as %
Working age
Population
(2000)
7
17.8
4.61
0.7
0.6
0.6
1.2
7
71.1
14.9
2.39
1.6
1.9
0.2
0.2
3
216
76.6
19.0
2.27
1.5
1.6
0.6
0.5
3
0.4
208
63.2
39.2
2.97
1.1
1.4
0.8
0.6
4
43
0.4
202
63.9
59.7
2.85
2.2
1.2
0.2
0.2
4
36.3
0.9
205.3
68.7
33.2
2.6
Vocational
Education
Attendance
Public
Spending
on
Childcare
OECD
Literacy
Test 5th
Percentile
Female
Labor Force
Participation
(1995-2003)
Part-time
Employment
Rate
(Female)
(2004)
d9/d1
Ratio
(2004)
UK
11
0.1
145
68.5
38.7
US
3
0.2
133
69.7
Finland
32
1.2
195
Sweden
36
1.6
Ger
34
Neth.
Average
Revealed Comparative
Advantage (2004)
46
Figure 1: Services Trade as Percentage GDP (OECD Average)
Services Trade % GDP OECD Average Excl Lux
25
20
15
10
5
04
20
01
20
95
92
98
19
19
19
86
83
89
19
19
19
80
19
74
71
77
19
19
19
68
19
62
65
19
19
Ye
a
r
0
47