Martha L. Olney and Aaron Pacitti: The Service Sector and the Business Cycle
Martha L. Olney and Aaron Pacitti:
More services means longer recoveries: Recovery from recessions takes longer than it has in the past. The current crisis aside, this change has not happened because recessions themselves are longer. Nor has it occurred because recessions are deeper than in the past. Instead this change is the result of slower economic growth following the end of a recession. And slower growth means longer recoveries. As shown below, the four longest recoveries in recent history, as measured by the number of months it took until the economy recovered all of the jobs lost during the recession, also have been the four most recent recoveries—those that followed the recessions of 1981, 1990, 2001, and 2007.
Why is it taking longer and longer for the U.S. economy to recover from recessions? We argue that the shift from being a goods-producing, manufacturing-based economy to a service economy — what some have termed “deindustrialization” — is causing the pace of economic recoveries to slow.... Since 1950, services have risen from 40 percent to 65 percent of output and from 48 percent to 70 percent of jobs. Yet the rise of the service sector is not necessarily a bad thing. Although there are many “bad” service jobs that pay low wages and are insecure, there are also many “good” service jobs.... The rise of services can be partially attributed to faster productivity growth in manufacturing and rising incomes. These are trends to cheer. Nevertheless, we find that there are large negative macroeconomic externalities from having a service-based economy—slower growth and longer recoveries....
[G]oods can be produced in anticipation of demand, and goods can be exported.... Goods-producing businesses are not dependent on domestic demand to increase production as the economy comes out of a recession. They can produce in anticipation of increasing demand or in response to increased external demand.... Service producers are not so lucky... must wait until the customer or patient is present....
We could look to public policy to step in and counterbalance the negative aspects of our current economic climate... promoting exports or encouraging domestic manufacturing. Another set of policies could address the effect... by strengthening the safety net.... Whether or not we choose to enact public policies, the new bottom line appears clear: with the economy more dependent on services, recoveries now take longer, exacting a severe toll on workers, firms, and the macroeconomy as a whole.
