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Who earns more: Service providers or goods producers?

Since the pandemic and its recession, service sector earnings have risen relative to the goods sector

The FRED Blog has discussed the demand and supply sides of the ongoing labor market shortages. Today, we examine the potential impact those shortages may have on labor compensation. That is, does the current level of job openings have an effect on earnings?

The FRED graph above plots data from the monthly Establishment Survey, which comes from the U.S. Bureau of Labor Statistics’ Current Employment Statistics program. It shows the average weekly earnings of all employees on payrolls in the service industry relative to those of employees in the goods-producing industry. The data are seasonally adjusted, so changes caused by seasonal factors such as back-to-school retail sales won’t distort the comparison.

The data (from March 2006 through September 2021) show that, until March 2020, for each dollar earned by a goods-producing employee, a service-providing employee earned approximately 78 cents. The COVID-19 pandemic, the recession it induced, and its aftermath changed that proportion. As of September 2021, for each dollar earned by a goods-producing employee, a service-providing employee earned approximately 81 cents. That’s almost a 4% increase.

Although we can’t put forward any single reason for the change in relative earnings, recent research by Sang Yoon Lee, Minsung Park, and Yongseok Shin looks at the unequal effects of the COVID-19-induced economic shock on the labor market. The authors find significant differences in employment across industries, occupations, and place of residence.

How this graph was created: Search for and select “Average Weekly Earnings of All Employees, Private Service-Providing.” From the “Edit Graph” panel, use the “Edit Line 1” tab to customize the data by searching for and selecting “Average Weekly Earnings of All Employees, Goods-Producing.” Last, create a custom formula to combine the series by typing in “a/b” and clicking “Apply.”

Suggested by Diego Mendez-Carbajo.

View on FRED, series used in this post: CES0600000011, CES0800000011

Government investment on the decline

U.S. government fixed asset investments are shrinking as a fraction of GDP

One role of government is to invest in public infrastructure: roads, bridges, public water and sewage, the military, etc. The FRED graph above shows this investment in fixed assets (by all levels of U.S. government) as a percentage of GDP.

We see several clear phases: 6-7% in the 1950s and 1960s, 5% in the 1970s and 1980s, 4% in the 1990s and 2000s, and around 3.5% since 2010.

As noted above, this includes military investment, which can explain the higher levels that coincide with the height of the Cold War. The subsequent decline, however, can possibly also be explained with military expenses: National defense as a percentage of GDP has declined, as our second graph shows.

This graph includes consumption expenditures for national defense: These expenditures are for services or things that don’t last more than a year, such as fuel, wages, and contractor costs.

It’s also possible that the non-defense components of fixed assets declined. Or not. We can’t come to any conclusions from just these data.

How these graphs were created: Search FRED for “government fixed assets.” From the “Edit Graph” panel, use “Edit Line 1” to add a series for nominal GDP (as the fixed assets series is nominal) and apply the formula a/b*100. For the second graph, repeat the exercise by searching for “defenses expenses.”

Suggested by Christian Zimmermann.

Why manufacturing declines, at least in relative terms

Data on the stages of economic development

As economies develop from their agrarian roots into modern societies, they invariably go through a similar transition.

  • Agriculture: First, everyone works in the primary sector—agriculture—simply to survive. Food comes first.
  • Industry: As subsistence farming becomes more productive through innovation, some labor is free to engage in other productive activities. And this secondary, industrial sector rises in importance, with manufacturing as a major component. Consider the Industrial Revolution!
  • Services: Finally, as productivity in the industrial sector also improves, labor can be devoted more and more to the tertiary, services sector. It doesn’t produce anything tangible, but services are clearly still useful.

The FRED graphs in this post show the fraction of the labor force devoted to each of these three sectors for five countries: Japan, Chile, the United States, South Africa, and Mexico.

Some of the transitions from one sector to the next can be seen even in the relatively short period that FRED data can cover. It’s more noticeable, however, if you compare countries: The more advanced countries have a small primary/agricultural sector and a large tertiary/services sector. The importance of industry (e.g., manufacturing) really depends on the state of the economy. Poorer countries (with less data available from FRED) and richer countries both have much less industry; it’s the middle-income countries that have a fair share.

How these graphs were created: Start from the OECD Main Economic Indicators by country release table, click on the country of choice, find the labor survey (if available), select quarterly seasonally adjusted data, check the three sectors, and click on “Add to Graph.” Finally, from the “Edit Graph” panel, use the “Format” tab to chose graph type “Area” with “Percent” stacking. Sample dates may need to be adjusted in cases of missing data.

Suggested by Christian Zimmermann.

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