An argument that the wage gap between the service-producing and goods-producing sectors has narrowed to the point that the service industries now offer wage opportunities very similar to those in manufacturing and construction.Service industries ; Wages

Mark E. Schweitzer

Max Dupuy

English

Research Papers in Economics

February 1,1994
eOONOMIG
GOMMeNTORY
Federal Reserve Bank of Cleveland
Are Service-Sector Jobs Inferior?
by Max Dupuy and Mark E. Schweitzer
U.S. manufacturers eliminated 65,000
more jobs than they added last month.
There was growth overall — non-
manufacturing employment rose by
198,000 jobs — but these service-sector
jobs are precisely the lower-paying,
benefit-scarce "hamburgerflipping"
kind that candidate Clinton scorned as
not good enough to spark the American
economic renewal he promised.
—The Washington Post, May 13, 1993*
An recent years, U.S. service-producing
industries have, on net, added jobs more
rapidly than the goods-producing indus-
tries. Since the end of 1990, jobs in
the service-producing sector have in-
creased 4.1 percent overall, while goods-
producing employment has shrunk 5.6
percent." During the same period, total
nonfarm employment has risen 1.9 per-
cent. A number of commentators have
used these basic statistics to paint a bleak
picture: The economy is creating some
new jobs and employing a few more
people, but only in low-wage service po-
sitions; meanwhile, the old high-wage
manufacturing jobs are disappearing.
This characterization is inappropriate
for three reasons. First, it takes for
granted a largely unfounded assertion
that service jobs pay considerably less
on average than manufacturing jobs.
Second, it focuses on average wage dif-
ferences, which are trivial compared to
the wide range of salaries available in
either sector. Third, it implies that new
entrants to the labor force—young
workers—are limited to finding jobs in
the industries with net job creation. In
reality, gross job creation is the correct
measure of the availability of work in
any sector.
In this Economic Commentary, we argue
that the service-producing industries now
offer wage opportunities very similar to
those in manufacturing and construction.
This finding holds for both broad and nar-
row industry classifications, as well as
for young workers. We do, however, see
a larger difference between wages in the
goods- and service-producing sectors for
workers with only a high school diploma.
• Goods-Producing vs. Service-
Producing Jobs — An Overview
It is unreasonable to describe service-
producing employment, which ac-
counts for nearly 80 percent of U.S.
nonfarm jobs, as "lower paying." In
1992, the average weekly wage for full-
time workers in this sector was only
3.9 percent below the average goods-
producing wage/
However, average wages can be mis-
leading, since they often draw attention
to the small difference between very
similar pay ranges. Figure 1 compares
the distribution of wages in the goods-
producing sector to that in the service-
producing industries. These distributions
have been smoothed to stress a point:
Although the average service wage is
less than the mean goods-producing
wage, the overlap of the two distribu-
tions is enormous. At almost any wage
rate, there is nearly the same proportion
of workers in both sectors.
Furthermore, the two distributions have
been moving closer since about 1980.
Figure 2 plots the difference between
the median goods-producing wage and
the median service-producing wage. The
median is a more appropriate measure
than the average because, in nearly all
industries, a few people earn relatively
Misconceptions about the relative
quality of jobs available to workers in
various industries abound. One of the
most difficult to dispel is the idea that
jobs in the goods-producing sector
are uniformly superior. Over the last
15 years, goods-producing wages
have fallen as service-sector pay has
increased, with the result that service
workers now generally earn about the
same as their counterparts in manu-
facturing. Consequently, policy that
favors goods-producing employment
is not necessarily a sensible strategy
for generating high-wage opportuni-
ties for American workers.
large amounts while most workers clus-
ter around some lower wage. This is
evident in the asymmetric shape of the
distributions in figure 1. The high
wages of the top-paid minority tend to
pull the average above what the major-
ity earns. The median, in contrast, is a
better measure of what most workers in
a sector are paid. In any given year, ex-
actly half of all workers earn more than
the median, while half earn less.
For most of the 1970s, a median
worker in the goods-producing indus-
tries consistently earned about 13 per-
cent more ($59 per week in 1992 dol-
lars) than the median service worker.
Since then, falling goods-producing
wages and rising service-producing
pay have conspired to narrow the gap.
In 1992, the median service job paid
$19 per week less than the median
goods-producing job — down from a
1979 difference of $82 (also in 1992
ISSN 0428-1276dollars). Still, the perception remains
that goods-producing jobs pay better.
• Comparing Narrower Industries
The two major employment sectors de-
scribed above can be further broken down
into eight specific industries—two goods-
producing and six service-producing.
These industries have a range of differ-
ently shaped wage distributions, as de-
scribed in table I.
5 The 10th percentile is
simply the wage that the lowest-paid 10
percent of workers fall below. The 90th
percentile is the wage that the highest-
paid 10 percent surpass.
Clearly, workers' wages depend in part
on which industry employs them. There
are two reasons for this. First, individuals
choose to work in particular industries
for reasons other than pay. Such consid-
erations include prestige, opportunities
for advancement, and appeal of the actual
work. If an industry is not generally pre-
ferred by the labor force, then managers
may have to pay a premium to attract em-
ployees. Second, some industries need
workers with advanced skills, experience,
or education. Individuals who possess
these characteristics command extra pay
from the industries that benefit from their
special abilities.
Service-producing industries are quite
diverse, ranging from retail trade,
which paid a 1992 median weekly
wage of $340, to transportation and
public utilities, with a median wage of
$605. Furthermore, there is significant
wage variation within each of the six
service categories. For example, a 90th
percentile employee in the finance, in-
surance, and real estate (FIRE) indus-
try earns a whopping 151 percent more
than the median FIRE worker. The 90th
percentile for retail trade is 126 percent
above the industry median.
In contrast, wages in the two major
goods-producing industries — manu-
facturing and construction — are some-
what more narrowly distributed. In
manufacturing, the 90th percentile
wage is only 110 percent higher than
the median, and for construction, the
comparable figure is just 100 percent.
This is an important point. The goods-
FIGURE 1 1992 WAGE DISTRIBUTIONS
^Goods-producing
0 200 400 600 800 1,000 1,200 1,400
Weekly wages (dollars)
FIGURE 2 DIFFERENCE BETWEEN GOODS- AND
SERVICE-PRODUCING MEDIAN WEEKLY WAGE
1992 dollars
80
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992
SOURCE: Authors' calculations based on data from the U.S. Department of Labor, Bureau of Labor Statistics.
producing sector does offer a few more
dollars per week at the median, but
many of the highest-paying opportuni-
ties are found in the service sector.
Note that at the 90th percentile, only re-
tail trade pays less than the goods-
producing sector.
So, if wage opportunities are not sub-
stantially different, why favor goods-
producing jobs over high-wage service
employment? One possible answer is that
for certain groups of workers — espe-
cially the young or relatively uneducated
— the goods-producing sector does in
fact offer unique opportunities.
• Young Workers
In order to determine whether the dif-
ferences between goods- and service-
producing wages are more pronounced
for young workers than for the work-
force as a whole, it is important to ask
what kinds of jobs workers entering the
labor force are taking.
Unfortunately, the most widely cited em-
ployment statistics do not supply the
answer. Each month, the BLS reports
which industries are creating new jobs on
net. For example, it recently announced
that insurance industry employment de-
creased by 1,000 in January, while pri-
mary metal manufacturing jobs were up
by 300. This, of course, does not mean
that insurance firms laid off precisely
1,000 people and primary metal manufac-
turers hired only 300. These are just the
changes at the margins of large industries
— insurance firms employ 2.1 million
people and primary metals manufacturers
employ 0.7 million.
Net employment figures likewise fail
to convey useful information about the
jobs that recent entrants to the labor
force are taking. For instance, in the in-
surance and primary metals example
above, it is impossible to know the age
or experience of workers being hired
and laid off. In particular, it is unclear
whether young workers are finding
jobs in primary metals rather than in
insurance, even though net employ-
ment flows are greater in the former.
Again, the alternative is to look at wage
distributions, focusing on where young
Americans are employed. Table 2 reports
the 1992 salaries of workers between the
ages of 25 and 30—individuals whoTABLE 1 1992 WEEKLY WAGES IN THE EIGHT MAJOR INDUSTRIES
Mean
10th
Percentile Median
90th
Percentile
Share of
Employment
Goods-producing
Construction
Manufacturing
Service-producing
Retail trade
Narrow services
Wholesale trade
FIRE
Public
administration
Transportation
and utilities
TABLE 2 1992
$587
565
593
564
425
563
611
636
648
650
$231
230
231
212
173
210
249
250
308
288
WEEKLY WAGES
10th
Percentile
$500
481
500
481
340
472
500
498
579
605
$1,019
962
1,049
1,000
769
1,019
1,091
1,250
1.038
1,050
FOR WORKERS AGE 25
Median
90th
Pereentile
27.9%
6.2
21.7
72.1
13.7
31.7
4.5
7.4
6.3
8.6
TO 30
Share of
Employment
Goods-producing $213 $417 $750 26.7%
Construction 195 391 738 6.8
Manufacturing 217 423 750 19.9
Service-producing 208 415 738 73.3
Retail trade 182 327 652 17.2
Narrow services 204 417 719 30.8
Wholesale trade 260 422 760 4.8
FIRE 250 433 769 7.9
Public
administration 308 500 817 4.9
Transportation
and utilities 235 495 865 7.7
TABLE 3 1992 WEEKLY WAGES FOR WORKERS WITH
ONLY A HIGH SCHOOL DIPLOMA
Goods-producing
Construction
Manufacturing
Service-producing
Retail trade
Narrow services
Wholesale trade
FIRE
Public
administration
Transportation
and utilities
10th
Percentile
$231
244
231
192
173
185
231
231
280
269
Median
$462
481
456
385
313
343
459
386
481
577
90th
Percentile
$846
899
827
750
673
615
885
692
810
922
Share of
Employment
33.9%
8.0
25.9
66.1
16.6
23.0
5.0
6.5
5.1
10.0
NOTE: Share of employment refers to our sample, which excludes mining and agricultural workers and Ihose
who work less than 35 hours per week.
SOURCE: Authors' calculations based on data from the U.S. Department of Labor, Bureau of Labor Statistics.
have generally completed their schooling
and have entered the work world. The
most striking aspect is the generally
lower paychecks of young workers relative
to the employed labor force as a whole, a
phenomenon that can be traced in part to
older workers' greater experience.
However, we want to look beyond the
wage effects of experience and concen-
trate on whether young workers cur-
rently encounter an abnormally large
wage gap between the goods- and
service-producing sectors. A relatively
substantial difference might indicate
that they face worsening employment
opportunities. For 25- to 30-year-olds,
the median goods-producing wage was
only 5 percent higher in 1992 than the
median service-producing wage, com-
pared with a 4 percent gap for the en-
tire workforce. This implies that goods-
producing jobs are not particularly
more lucrative for young workers.
In terms of actual employment, table 2
shows that young workers are split
among the eight major industries in
nearly the same proportions as the over-
all working population. This is a sign that
jobs are indeed available for new work-
ers in the shrinking goods-producing sec-
tor. It also indicates that some young
workers are finding higher-paying serv-
ice jobs. Though a slightly inflated pro-
portion of young workers are employed
in retail trade (the lowest-paying major
industry), this does not justify a policy
preference for goods-producing employ-
ment. After all, high wages are desirable
no matter who is paying them.
• High School Graduates
We have seen that the wage gap between
goods- and service-producing jobs is neg-
ligible, even for young workers. But
there is an exception worth noting. Given
the growing importance of advanced edu-
cation, particularly in certain service in-
dustries, goods-producing jobs may rep-
resent a more critical source of higher-
paying positions for workers with only a
high school degree. Indeed, the goods-
producing sector accounts for a rela-
tively large 33.9 percent of all employ-
ment for this group (see table 3). Even
more important, high school graduates'
median wage is a hefty 20 percent higher
in goods-producing jobs than in the serv-
ice sector (as opposed to only 4 percent
higher for the general labor force).
The goods-producing industries also
offer those without advanced education
some of their best opportunities for high
pay. For the overall workforce, the 90th
percentile wage for goods-producing
industries is only 1.9 percent higher
than for the service-producing sector.
In contrast, for high school graduates,
the difference at the 90th percentile is
12.8 percent.• Conclusion
Clearly, the "hamburger flipping" charac-
terization of service jobs is inaccurate.
The real issue is matching workers to
their best wage opportunity. The goods-
producing sector does not always offer
the best wages for every worker — a
wide range of high-paying jobs is also
available in the service-producing side
of the economy. Furthermore, there is a
surprising degree of overlap between
weekly wages in the two sectors, such
that even milder characterizations of
service jobs as inferior are not borne
out in the data.
The one group that appears to benefit
from more goods-producing jobs is
less educated workers. However, this is
not an adequate argument for design-
ing a policy that would shift the distri-
bution of employment opportunities
toward goods production. Instead, it
suggests once again the importance of
educating Americans to meet employ-
ers' needs.
• Footnotes
1. See Jim Hoagland, "It's Jobs, Remember?"
The Washington Post, May 13, 1993, p. A27.
2. The Labor Department's Bureau of La-
bor Statistics (BLS) classifies all nonfarm
jobs as either goods-producing or service-
producing. The monthly BLS employment
statistics are often misinterpreted by the me-
dia: Service-producing jobs are frequently
referred to simply as service positions, while
goods-producing jobs are often mistakenly
identified as "manufacturing." We follow the
BLS classification scheme, in which the
goods-producing sector includes not only
manufacturing, but also construction and
mining. The service-producing side of the
economy covers six major subindustries:
"narrow" services (comprising business serv-
ices, health services, and traditional service
positions such as hotel jobs); retail trade; pub-
lic administration; wholesale trade; finance,
insurance, and real estate; and transportation
and public utilities. The cited changes oc-
curred between December 1990 and Decem-
ber 1993.
3. We use data from the BLS's March Cur-
rent Population Suivey, which includes yearly in-
formation on a sample of nearly 60,000 house-
holds. All wage statistics refer to the weekly
wages of full-time workers (those who work
more than 35 hours per week, not necessarily
at only one job). The workweek for full-time
workers is concentrated at 40 hours, so a
comparison of weekly wages yields results
very similar to a comparison of hourly wages.
4. In raw form, the distributions have jagged
shapes because wages tend to group around
certain whole and fractional dollar amounts.
5. We exclude mining because its relative
employment share is so small that the CPS
data cannot accurately describe it.
6. Gross employment flows are typically
much greater than net employment changes
in most industries. See S. Davis and J. Halti-
wanger, "Gross Job Creation, Gross Job De-
struction, and Employment Reallocation,"
Quarterly Journal of Economics, vol. 108,
no. 3 (August 1992), pp. 819-64.
Max Dupuy is a research assistant and
Mark E. Schweitzer is an economist at the
Federal Reserve Bank of Cleveland.
The views stated herein are those of the
authors and not necessarily those of the Fed-
eral Reserve Bank of Cleveland or of the
Board of Governors of the Federal Resenv
System.
Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland, Ohio 44101
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Are service-sector jobs inferior?

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Are service-sector jobs inferior?

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