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Industrial Organization This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: The Growing Importance of the Service Industries Volume Author/Editor: Victor R. Fuchs Volume Publisher: NBER Volume ISBN: 0-87014-410-3 Volume URL: http://www.nber.org/books/fuch65-1 Publication Date: 1965 Chapter Title: Industrial Organization Chapter Author: Victor R. Fuchs Chapter URL: http://www.nber.org/chapters/c1699 Chapter pages in book: (p. 17 - 19) THE SERVICEINDUSTRIES 17 doctors can think more of their bank bal-egalitarian. High per capita income im- ances than of their patients. The sales-plies high average output per man. This man who must go through life with anis likely to mean very high output per artificial smile on his face while caringman in some industries (where capital little for his customers and less for whatcan be substituted for labor, and techno- he sells is often held in low regard. Butlogical change is rapid). Employment, at their best many service occupationstherefore, will probably be primarily in are extremely rewarding and the line be-those industries, such as personal serv- tween "work" and "leisure" activity isices, where output per man advances often difficult to draw. slowly. Our attitudes toward personal Some serviceoccupations,notablyservices are not immutable laws of na- those involving personal service, are notture; they can be changed. Such a change well regarded in this country. A study ofwould, I suspect, reduce unemployment why so many Americans consider per-and increase consumer satisfaction. sonal services to be degrading would be very useful. It may be a cultural lag, INDUSTRIAL ORGANIZATION rooted in the level of income and the dis- The shift of employment to the service tribution of income that prevailed insector carries with it important implica- this country and abroad in the eighteenthtions for industrial organization in the and nineteenth centuries. United States because the size of the When the average level of per capita"firm" and the nature of ownership and income in a country is low, the amountcontrol are typically different in the two of personal services rendered is probablysectors. a function of the distribution of income. Ingoods,with some notable ex- It is probably also related to social im-ceptions, such as agriculture and con- mobility and inequality of opportunity.struction, most of the output is account- In Europe, where there was more in-ed for by large profit-seeking corpora- equality and more immobility, there wastions. Ownership is frequently separate probably proportionately a much greaterfrom management, and significant mar- consumption of personal services. Theseket power held by a few firms in each services were rendered by the low-bornindustry is not uncommon. and the poor to the privileged classes and In the service sector, on the other the wealthy. Americans probably tendedhand, and again with some exceptions, to associate personal services with thisfirms are typically small, usually owner- inequality and noticed that there wasmanaged and often noncorporate. Fur- much less of it in the more democraticthermore, nonprofit operations both pub- United States. lic and private account for one-third of It can be argued, however, that therethe sector's employment. is nothing inherently degrading in per- Table JO summarizes some of the sonal services. In a country with a highavailable information concerning the dis- average level of income, one should ex-tribution of employment in different pect that a large amount of personalservice industries by size of employer. service will be consumed and that a largeThe size distribution in manufacturing number of people will find employmentis included for comparison. In wholesale in that way. This would be true even iftrade, retail trade, and selected services, the income distribution were completelyaccounting for more than 50 per cent of 18 THE SERVICE INDUSTRIES the service sector, half of the employ- Other things being equal, the shift to ment is in companies with fewer thanservices tends to increase the relative im- twenty workers. In finance, insurance,portance of small firms in the economy. and real estate, 40 per cent is in veryThere are, however, forces within many small firms. Another large fraction ofindustries that tend to increase the size service-sector employment is accountedof the average "firm." The pressure for for by self-employed professionals andconsolidation of school districts and other domestic servants, not shown in thelocal government units is a notable ex- table. They represent the extreme inample. Bank mergers is another. The net small size of employer. effect of these countertendencies is diffi- Private (i.e., non-governmental) hos-cult to predict. pitals are considerably larger than the TABLE 10 typical service firm; but even so, more than half the total employment of these PERCENTAGE DISTRIBUTION OF EMPLOYMENT BY SIZE OF FIRM OR EMPLOYER IN MANU- institutions is in hospitals with fewer FACTURING AND SELECTED SERVICE INDUS- than 500 employees. Similarly, only rela- TRIES tively few private schools or colleges could be classified as large. EMPLOYMENT SIZE Government, which is often referred to as a "huge bureaucracy," actually in- Fewer Fewer cludes many small employers. It is worth than20 than 500 noting that employment at the local level 1. Manufacturing (1958) 7 38 of government now exceeds that of state 2. Wholesale trade (1958) 47 93 3. Retail trade (1958) 56 78 and federal (civilian) government com- 4. Selected services (1958) 57 87 bined. One-half of this local employment 5. Finance, insurance, and real estate (1956) 41 67 is in governmental units with fewer than 6. Hospitals (non-governmen- 500 employees. tal, 1963) na. 52 7. Local government (1962).... n.a. 49 One statistic that epitomizes some of the trends already discussed is the per- Source: Rows 1—4, Bureau of the Census, Enterprise StaUs- tics: 1958 Fart I, General Report, p. 30 adjusted to include centage of the national income originat- self-employed proprietors by assuming that they are in firms with fewer than twenty employees; row 5, Betty C, Churchill, ing in business corporations. Ever since "Size of Business Firms," Survey of Current Business, Septem- ber, 1939, p.19, adjusted for self-employed proprietors as the development of the private corpora- rows 1—4; row 6, American Hospital Association, Hospiiais, Guide Issue, 1964, estimated from distributions by number of tion, its role in the economy has tended beds; row 7, Censusof Government.Compendium of Government to grow; but its relative importance ap- Employment, 1962, estimated in part. parently reached a peak about 1955, when corporations accounted for 55.8 per Industries in which small firms ac- count for the bulk of the output typically cent of total national income. Since then do not present industrial control prob- there has been a tendency for this frac-lems of the "trust-busting" variety. On tion to decline, and in 1963 the level wasthe other hand, the growth of such in- 53.8 per cent, approximately the same asdustries may increase the need to guard in 1948.19 against the restrictive practices of trade '9 Data on national income originating in cor-associations and professional organiza- porations and in the total economy are published tions. Small firms may pose another by the National Income Division of the Office of Business Economics in the Survey of Current Busi- problem for the economy because it is ness and associated publications. alleged that they do not allocate suffi- THE SERVICEINDIJSTRIES 19 cient resources to research and other ac-input of physical capital is small. In tivities with large external benefits. barber and beauty shops, for example, The growing importance of the non-labor and materials account for between profit sector will probably pose some dis-80 and 90 per cent of total cost. Another turbing questions about how to promotepoint to be noted is that in the largest efficiency and equity in such organiza-service industry, retail trade, an impor- tions (cf. the problems with Blue Cross).tant part of the capital input takes the When non-profit operations representform of inventories rather than the out- only a minor exception to an essentiallyput of the capital goods industries. private-enterprise economy, the problem In pointing out the relatively lower is not very serious. But if we ever reachcapital intensity of most service indus- the stage where non-profit operationstries, I am not attempting to revive a tend to dominate the economy, we prob-"stagnation" theory in any form. The ably will be faced with the need for radi-maintenance of high levels of employ- cally new instruments of regulation andment and a rapid rate of growth is logi- control. cally consistent with a decline in the rel- ative importance of physical capital in DEMAND POR PHYSICAL CAPITAL the economy. The important point is to There are some portions of the servicerecognize that, if such a decline occurs sector that use large quantities of phys-because of interindustry shifts, it may be ical capital. Real estate and the servicesa proper and useful adjustment to new provided by government roads and high-circumstances, with important implica- ways are notable examples. By and large,tions for relative profit levels in different however, goods industries tend to beindustries. While the national rate of more capital intensive than services. Insavings may be just as high as before, recent years (1960 through 1963) busi-other forms of investment, such as edu- ness expenditures for new plant andcation, that are not customarily included equipment in goods industries were ap-insavings-investment estimates may proximately three times as great as intake on increased importance. profit-seeking service industries; the com- parable ratio of output levels in the two BUSINESS CYCLES groups of industries was only 1.25 to It is generally believed that the service 1.00.
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