Nor can the differences be attributed to the organization of the sales force, since the numbers measure only administrative costs; to the productivity measure chosen, since other measures, such as insurance in force (the total amount of insurance a company has underwritten) or total assets, yield similar results; or to wage costs, since they differ only slightly among the companies.
The transition from a manufacturing-dominated economy to a health care-driven economy wasnt direct. We hope to show their limitations here and present a new explanation that lays the blame in two places: the ineffectiveness of many U.S. business managers at improving productivity and the inherent complexity of the service sector itself. In an economy where farming and manufacturing as a proportion of total economic activity are in decline, and services are rapidly ascendant, the skills necessary for the workplace are being redefined, Citi CEO Michael Corbat said in a recent television appearance. In January 2017, Barack Obama left office with manufacturing jobs accounting for about 8.6% of all jobs. Exercise equipment now comes with live-streamed instructions. Today, U.S. manufacturing accounts for only 1 in 12 jobs. First, undermeasurement of quality has been cited as an explanation since the 1950s, but there is little evidence that it has increased. The February 2021 jobs report issued by the U.S. Bureau of Labor Statistics indicates that payrolls increased by 379,000 jobs over January 2021, nosing the national unemployment rate down from 6.3% to 6.2%. That is not only because of the sectors size but also, and more important, because it can be notoriously difficult to manage. One example is the spectacular long-term growth in agricultural productivity: the farm labor force has been reduced to almost nothing, and yet the sector is a foundation of U.S. prosperity. Manufacturing gains, such as the modest ones experienced in February 2021, generate enthusiastic conversation stemming from the outsized belief that these gains are economically and politically transformative: to wit, former president Trump entered office with the specific claim that he would boost Americas manufacturing capacity and add jobs.
IBMwhich has been in business for over a centurygamely shifted from predominantly manufacturing hardware to prioritizing growth in information services, which was widely seen as its saving grace. The company brought in an outside operating executive who, in her previous job at another insurance company, had achieved a 35% cost reduction. First, the pressure on manufacturing workers in the United States has generally been overstated, often for political purposes. Consider the differences in workforce planning in the two sectors. According to the St. Louis Federal Reserve Bank, U.S. manufacturing jobs accounted for one-third of total employment in 1945. Northwestern Mutual, for example, has long been acknowledged as the low-cost provider of life insurance. Historical evidence suggests that, on balance, recessions have a negative impact on productivity levels. If traditional service sectors like finance, entertainment and telecommunications have already experienced their digital revolutions, a number of major industrial sectors represent the next frontier of our economys ongoing transformation to a predominantly service-centered web of activity. Its astonishing what happens when senior executives pay attention to how work actually gets done. A necessary first step for managers is to identify the distinct activities performed in their companies and deal with each in an appropriately tailored way. As the components of technologyespecially hardwarebecome inexpensive and commoditized, you want to focus less on the components and more on how customers want to use technology, former IBM senior technology strategist Irving Wladawsky-Berger said. The traditional understanding of goods as distinct from services dates back to the Industrial Revolution, when the advent of manufacturing created advanced economies and raised the standard of living for millions of people. Thus, at the industry level, there may be little consequent productivity gain.
Effort was diverted from carrying out improvements to identifying and promoting what had been achieved. The differences in productivity cannot be attributed solely to differences in the product mix. The second major piece of evidence in support of a management-based understanding of service sector productivity is the existence of wide and persistent disparities in performance between the best service companies and their competitors. A member of The Counselors of Real Estate and a Fellow in the American Institute of Certified Planners, Owen concluded several years of service as a member of the Orlando Housing Board of Commissioners. His claim was not unusual and aligns with the idea that American wealth is sustained through the power of industrialization. Manufacturing companies do not enjoy local niches sheltered from the full force of foreign competition. Even technology changes at a relatively steady and predictable rate. The role of fast-food workers is an obvious case in point. The technology involved was standard and well tried. If anything, those would have worked against Northwestern because it sells relatively more low-premium term policies than high-premium whole-life policies. As manufacturing jobs declined in the middle of the 1990s, retail trade jobs took over. as well as other partner offers and accept our, NOW WATCH: Fed's Bullard gave us a great baseball analogy to explain what the Fed is doing wrong, we got more news that the services sector. In 2017, health care surpassed both. The Atlantics Derek Thompson highlighted in his column, Health Care Just Became the U.S.s Largest Employer. Services are the new steel.. A version of this article appeared in the. The primary reason why the productivity growth rate has stagnated in the service sector is management. Contact Senior Director Owen Beitsch, PhD, FAICP, CRE, 321.319.3131, for more information about the GAI Community Solutions Groups urban planning, economics, and strategy services. Last year, the services sectora broad category of the economy that now includes financial services, media, transportation and technologyaccounted for 67 percent of GDP in the United States. How Productivity Varies in the Insurance Industry. Consider the following scenario: Assume that there is a productivity gap of three to one between the best performers in an industry and the laggards. Despite their many failings, techniques such as total quality management, best-practice analysis, process reengineering, just-in-time management, team-based management, and time-based competition helped to focus manufacturing managers attention on productivity and, in the process, helped them bring their companies back to life. Today, the health care and social assistance industries are the largest employers in 34 states. But there is increasing concern because improvements in productivity growth are continuing at low levels despite the expenditure of trillions of dollars on information technology. The emphasis on managing credit losses was understandable, as a further run-up in net credit expense would have had a disastrous effect on the companys finances. Sometimes the total number of manufacturing workers has itself increased, but their share in the total jobs picture has steadily declined. Since 1980, improvements in productivity in the manufacturing sector have moved the United States from a position of near terminal decline to renewed world dominance. Information technology staff members would be used to carry out the project, although a handful of outsiders were hired for critical positions. If, over a 20-year period, all the laggards could close that gap, then the industry would be able to enjoy 3% annual productivity growth over that period. The telephone companies, because of their common Bell System inheritance, use the same basic technologies, pay the same basic wages, and operate under the same basic labor agreements. Although managements effectiveness may be what drives the service sectors productivity, we are still a long way from seeing improvements in the sector at the level of the macroeconomy. Owen Beitsch, PhD, FAICP, CRE has been active in the management and execution of complex studies for public and private clients for many years. Because the productivity-improvement strategies appropriate to each type of activity are quite different, it is essential to identify these separate functionswhich often are embedded in the same companyif progress is to be made in improving productivity. Such planning must be a part of any reengineering, quality-management, or other technique-driven approach to performance improvement. Their responsibilities often include production (making the fast food), retail service (delivery to customers), customer service (making sure that customers have an enjoyable experience), and transaction processing (accepting payment and making change). Overall employment has continued to grow and has grown especially rapidly for managerial and professional workers. At the beginning of the Great Recession, there were 2.4 million more workers in retail than health care. The first compelling piece of evidence for the view that productivity is management driven is the improved performance of U.S. manufacturing. Compared with manufacturing, service operations are more rigid, involving a basic level of capacity that must be set in anticipation of demand (for example, the number of phone lines, switches, or stores). Five broad categories of evidence point in this direction: (1) the productivity turnaround in manufacturing; (2) the large and persistent gaps between the performance of average service companies and the best-run companies; (3) the fluctuating patterns of productivity growth at many service companies; (4) certain special events, such as management buyouts, that demonstrate the high levels of unexploited potential; and (5) our detailed case studies of individual companies productivity performance. The Digital Revolution has edged out the era where economists could neatly distinguish manufacturing from the service sector. The installation period was less than two years, the technology had been available for a few years, and the existing customer-service labor force was largely unaffected and unchanged (except for some minor training).
Even in the midst of the COVID-19 pandemic, the ability to prepare and distribute multiple mRNA vaccines is unprecedented and further underscores the advantages of harnessing new technology to boost manufacturing processes. Keeping highly skilled workers in jobs in which they are not needed is no solution to the nations productivity difficulties. A third and mind-numbingly familiar explanation is that output in the service sector is far below its potential because of a number of macroeconomic factors. This situation is in marked contrast to that in the service industries, where competition is predominantly local. TheAtlantic.com Copyright (c) 2019 by The Atlantic Monthly Group. Indeed, total U.S. manufacturing jobs peaked nearly 2 decades before the North American Free Trade Agreement. The rise of digital banking, even, has led to growth in sectors like IT security, with 63 percent of banks saying that 50 percent or more of their IT will be cloud-based.
The governments most important contribution may be to minimize the demands it makes on the attention of business leaders. At the same time, both the volume and complexity of transactions increased with no significant upgrading of the labor force. One of the factors complicating the achievement of productivity gains in the service sector is that, unlike many manufacturing companies, in which product engineers are asked to work on long-term projects, service companies tend to assign their staffs to temporary projects. Under some circumstances, it also may involve stock management and simple building maintenance. Robert H. Hayes and William J. Abernathy, the authors of Managing Our Way to Economic Decline (HBR JulyAugust 1980), are as relevant today as they were in the 1980s, when they argued that productivity performance lies predominantly in the hands of managers. Or, in frustration at not having achieved projected workforce reductions, they eliminate both jobs and employees without ensuring that the people who go correspond closely to the work that is being eliminated. In addition, about $2.18 million in onetime expenses were incurredmostly labor costs associated with bringing the new system online. So in order to understand how productivity fluctuates at companies, one needs to look first and foremost at the actions of management. Many of the important managerial techniques that have been developed in recent years are production oriented, and if they were indeed the decisive development in the turnaround of manufacturing, then it seems unlikely that service productivity would be able to improve without a similar refocusing of managers attention. Clearly, once managers attention was no longer sustained, productivity improvement dropped off.
American cities where manufacturing used to hold sway are evidence of that reversal. Efficiency gains at individual companies were rapidly translated into gains in the industry and the overall economy. Retail jobs were hit hard by the recession; between 2008 and 2009, 13 states went from retail-dominant to health care-dominant. This content is made possible by our sponsor; it is not written by and does not necessarily reflect the views of. Today, the picture is totally different: Manufacturing is the dominant industry in only seven states. Customer service costs per access line in 1991 ran from a low of $32.40 at US West to a high of $49.30 at New York Telephone. For example, improved retail efficiency will not always translate into lower prices or higher quality at the local level. In coping with the balance sheet, workforce level, cash flow management, and other concerns that typically confront companies during recessions, managements attention seems to be diverted from the everyday task of continuous performance improvement, and the resulting declines in efficiency are long lasting. Economists and many managers have tried to treat service as an undifferentiated amalgam. Compare its productivity growth with that of the manufacturing sector, for example. Its total investment was estimated to be about $7 million: about $4 million for new investments in computers and about $3 million for additional operating expenses. Existing employees needed little training to perform the new jobs. The most important contribution that government is likely to make in this effort is to minimize its demands on the attention of business leaders. A few recessions, the rise of off-shoring and imports from China and the rest of the world and the explosion of the health-care industry, to begin with. Guest blogger economist Owen Beitsch, PhD, FAICP, CRE, senior director with GAIs Community Solutions Group (CSG), shares informed analysis of how the percentage of U.S. manufacturing jobs stacks up against those of the nations other economic sectors. Even as the value of manufacturings output has increased, its share of the economy continues to drop as shown in both figure 1 and figure 2 below: An explanation for these trends often centers on trade imbalances and practices, with much of the criticism focused on Chinas and other trading partners practices and capabilities. Many factors complicate the task of achieving a management-driven revival in service productivity comparable to that in manufacturing, but they do not put it entirely out of reach. There are a number of current explanations for why productivity growth has stalled in the service sector. Why hasnt productivity grown as fast in the service sector as in the manufacturing sector? Consider the experience of NYNEX Corporation. Their entry, in turn, may not drive down prices or drive up the quality of service; instead, it may divide the existing sales in the market more finely among local competitors. Investment and depreciation alter a companys capital stock by only a small percentage in any given year. And in turn, the American economy will be better for it: Itll create jobs, bolster a number of sectors, and make the goods and services we rely on more efficient. Workforce. Watch the U.S. transition from a manufacturing economy to a service economy, in one gif, The misleading claim that a Democratic candidate sued a group of nuns over contraception coverage, RNCs Biden cheap fake paints a misleading picture of mental fitness, A guide to fact checks of candidates seeking the Democratic nomination, 18 million jobs in 1990 to just over 12 million jobs today, Bureau of Labor Statistics Editors Desk blog. When carefully conceived, they can be quite beneficial to the countrys economic and social well-being. Those skills would be the essential input to more broadly defined manufacturing processes, an approach that builds capacity and labor income without erecting destructive trade and protectionist practices. In other words, save more, improve education, conduct more R&D, and the service sectors problems will be solved.