Driving Forces and Game Changers: The Transition from Industry to Services

4.3. Driving Forces and Game Changers

• Employment is a major political concern, but labour productivity is also important.

Labour productivity can be improved by the capital ratio (K/L, machinery to labour ratio), or by rises in total factor productivity (TFP).

Work total factor productivity (TFP) is the product of improvements in technology innovation, human capital, and management competences.

Golden days: 1944-1970. Many technological advances: electricity, internal combustion engine, running water, communications, chemicals, petroleum, etc. This led to the development of knowledge-intensive branches like ICT (Information and Communication Technologies).

Productivity is increasing more slowly since the 1970s than during the Golden Age, in part because of the decline of manufacturing and the rise of services.

Unions' power was high since the late 1960s and workers were getting higher wages in spite of lower increases of productivity.

The golden rule of collective bargaining, that "wages must keep pace with productivity", was broken.

(since) 1974: demand couldn't keep pace with productivity increases in mature industries and unemployment was created.

The relative decline of industry and the rise of services

We've seen two major changes: the transition from rural societies to national markets based on industry, and from that to a global market system geared to services.

Reasons for the relative decline of industry and the rise of services:

• DEMAND SIDE: Engel's law, which states that the relative amount of income that an individual spends on food and industrial products declines as their income rises.
• SUPPLY SIDE: Productive growth in the industrial and agricultural sectors leads to higher productivity and less employment in those sectors. Services are more inflationist than industrial products. Workers in the service sector take the manufacturing industry as a reference and obtain higher wage increases than they deserve due to the logic of productivity (according to Baumol).

When output in the manufacturing and service sectors is measured at constant rather than at current prices, the shift in expenditure away from manufacturing to services is not as significant as the shift away from employment in manufacturing to services.

One more reason for the declining industrial figures is the outsourcing of business services by manufacturing companies.