Producer Services Industries: Why Are They Growing So Rapidly?

By Tschetter, John | Monthly Labor Review, December 1987 | Go to article overview

Producer Services Industries: Why Are They Growing So Rapidly?


Tschetter, John, Monthly Labor Review


Producer services industries: why are they growing so rapidly?

Economists continue to search for the causes of the dramatic post-World War II growth in service-producing industries.1 Some claim that the growth simply reflects changes in the way U.S. companies are doing business, according to the following argument:2 To be competitive in domestic and international markets, manufacturing companies need to reduce their overhead costs. To do this, companies are transferring service-type activities formerly performed by in-house staff to firms which specialize in those activities. Persons subscribing to this hypothesis believe that these simple transfers of activities--called "unbundling"--account for a significant proportion of the output and employment growth in the service-producing industries, but contribute little to the total economy.

This article examines producer services industries, an important subset of the service-producing industries. We want to review several possible explanations for the growth of this important group of industries, particularly the unbundling hypothesis. Producer services include advertising, computer and data processing services, personnel supply services, management and business consulting services, protective and detective services, services to dwellings and other buildings, legal services, accounting and auditing services, and engineering and architectural services.3 In 1986, producer services industries employed about 6.8 million wage and salary workers, or 6.8 percent of nonagricultural workers.

Certain common threads unite these very diverse industries. Producer services industries perform activities that are usually classified as overhead in other companies. They have grown faster than the total economy, in terms of both output and employment, for several decades. In fact, their performance has outpaced that of the service-producing industries as a group. However, based on the evidence presented in this article, the unbundling explanation accounts for a very small portion of the recent employment growth of producer services industries.

Overview of producer services

The industries as a group. Wage and salary employment growth in the producer services industries has been rapid relative to total nonagricultural employment and to total employment in the service-producing industries for several decades.4 The following tabulation contrasts average annual rates of change (in percent) for selected economic sectors and periods:

Self-employment is growing faster in producer services industries than in either the total nonagricultural economy or service-producing industries. In 1986, 15 percent of the self-employed persons in the nonagricultural economy were found in producer services:

During the 1982-86 span, wage and salary employment in the U.S. nonagricultural economy increased by 10 million persons. The producer services industries employed 1.9 million of these additional workers. This increase represents 19 percent of the nonagricultural employment change.

As shown in the next tabulation, output of producer services industries also has grown several percentage points faster than that of the total economy.5 In 1986, 6 percent of the United States' gross product originating or value added occurred in producer services. (Levels are in billions of 1982 dollars; changes are average annual rates, in percent.)

Finally, the number of establishments classified in the producer services industries increased more rapidly between 1982 and 1986 than the number in either the total economy or in the service-producing industries. As indicated below, about 10 percent of all reporting units covered by State unemployment insurance laws in 1986 were in producer services. (Levels are in thousands of units; changes are average annual rates, in percent.)

Individual industries. Although we are studying producer services industries in the aggregate, they are by no means a homogeneous group. …

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Producer Services Industries: Why Are They Growing So Rapidly?
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