One test of whether our political leaders are looking to the economy’s future or clinging to its past is whether they show an understanding that most of our future lies in the services economy.
Whether they hanker for an economy where most people earn their living by growing things, digging things out of the ground or making things.
Probably only the dearly departed Malcolm Turnbull passes this test, with his early enthusiasm for innovation and agility. Kevin Rudd said he didn’t want to be the leader of a country that didn’t make things. Scott Morrison took a lump of coal into the Parliament to show where his allegiances lay.
But as the Organisation for Economic Co-operation and Development reminds us in its latest report, the shift from producing goods to performing services is fundamental to the process of economic development.
Every country’s economy starts on the economic development journey with most people working on the land, and others in mines. That’s where we were in the 19th century. About a hundred years ago, the great migration from the country began, with more and more people moving to the city to work in factories.
By 1971, employment in manufacturing had reached 1.4 million workers. Manufacturing’s share of total employment in Australia reached 25.5 per cent a little earlier in 1966.
But from that period on, employment in manufacturing began to decline, both in absolute numbers and as a share of the total.
It – and employment in the other goods industries: agriculture and mining – declined as a share of the total simply because employment in the services sector grew much faster.
So, for at least for the past 50 years, it’s services that have been going up while goods industries have been going down. That’s true whether you look at shares of total employment or shares of total production (gross domestic product).
When you turn to the absolute numbers of workers, they’ve been declining in agriculture for more than a century. Today, just 325,000 people work on the land.
In manufacturing, they’ve been falling since 1971, to be down to 980,000 today.
Mining employment got a fillip from the resources boom, but even its job numbers have resumed their decline since 2013, and are now down to 245,000 – or just 2 per cent of our total employment of 12.6 million.
There’s nothing peculiarly Australian about this move from farming to manufacturing to services. You can see just the same progression in other rich economies and in “emerging” (that is, rapidly developing) economies.
It’s been unfolding before our eyes in China since it began opening its economy to the world in the late 1970s. It was all the people leaving its farms to work in city factories that, a few years ago, took the proportion of the world’s population living in urban areas to more than half.
Returning to Oz, don’t get me wrong. Some of us will always be working in the goods part of the economy. That’s particularly true of Australia because, though we’ve never been great shakes at manufacturing, we have had, and will continue to have, a comparative advantage in agriculture and mining, relative to other countries.
Note this: though the number of people working in the three parts of the goods sector has been falling, that doesn’t mean we’re growing less food or digging fewer minerals. Our annual production of food and minerals and energy is greater than ever. Even in manufacturing, our annual production has been falling only since 2008.
How can production go up while employment goes down? Easy. Increased productivity of labour caused by automation – technological advance. The use of more and better machines has made farming, mining and manufacturing more “capital-intensive” and so less “labour-intensive”.
That’s the thing about the goods side of the economy: it’s relatively easy to use machines to replace men (and women). And this isn’t bad, it’s good – for two reasons. First, it’s helped make goods cheaper, thus making us more prosperous.
Second, it’s much harder to use machines to replace workers delivering services. Robots will change this to an extent, but by not nearly as much as the alarmists claim.
And it’s not hard to think of more services we’d like other people to do for us. That’s why total employment is higher than it’s ever been. And why further growth in services’ share of total employment and production is inevitable and inexorable.
Where will the new jobs be coming from? That's where.
The OECD report tells us that, in 2014, the goods sector’s share of production was down to 17 per cent (agriculture 3 per cent, mining 6 per cent, manufacturing 8 per cent), with the services sector’s share up to 83 per cent – about average for the OECD.
Within services, the biggest industries are: business services, 14 per cent of GDP; wholesale and retail trade, 10 per cent; financial services, 9 per cent; construction, 8 per cent; health and aged care, 7 per cent; education 5 per cent and defence and public administration, 5 per cent.
A favourite argument the goods industries use to exaggerate their importance to the economy is to point to their higher share of exports (a widget sold to a foreigner is more virtuous than one sold to a local, they claim).
A third of all our agricultural production is exported. For manufacturing it’s more than a quarter (bet you didn’t know that) and for mining it’s more than 90 per cent. For services it’s a mere 11 per cent.
This means that, as usually measured, agriculture contributes 8 per cent of total exports; mining, 40 per cent, manufacturing 26 per cent, and services, 26 per cent.
Education of overseas students is now our third biggest export, after iron ore and coal. Tourism is the other big one.
But the OECD points out that the goods we export have inputs of services embedded within them. Allow for this and agriculture’s share of total export “value-added” drops to 5 per cent, mining’s to 30 per cent and manufacturing’s to 13 per cent, while services’ share rises to an amazing 52 per cent.
Services are taking over the economy. Live with it.