Service Sector Needs More Than Job Cuts to Get Back on Track

Sometimes today’s economy is like an illness--before you even think about getting better, you want to know just what’s wrong with you. Right now, even though experts insist that the economy is recovering from recession, the people don’t believe it.

Most people believe that there will be fewer jobs in the next year and that their income won’t go up, according to the latest survey of consumer confidence by the Conference Board, a business research organization.

And the people are onto something, although they may not fully understand what it is. What we’re witnessing is the restructuring of the service sector, the industries from retail to finance, transportation to media and high technology, that provide roughly 75% of the 117 million jobs in the U.S. economy.

All of those industries are undergoing change, cutting staff, striving for ways to operate more effectively and efficiently. And the process will continue for some years--just as the restructuring of U.S. manufacturing took up most of the 1980s.

If successful, the transformation of service industries will improve the U.S. economy, creating opportunity and an increase in national wealth. But meanwhile the process just looks messy. Bank mergers--such as the giant combinations of BankAmerica-Security Pacific and Chemical-Manufacturers Hanover--are eliminating tens of thousands of jobs. Merged banks, after all, can get along with one computer system, one accounting department.

Banks are not alone; insurance companies are cutting staff, the brokerage industry is said to have cut back by 40%!

Advertising agencies, television networks and newspapers are cutting staff. Real estate, accounting and even law firms are cutting back too.

Small wonder there’s a lot of gloom and doom: Service businesses created 20 million jobs in the 1980s. Their cutting back raises prospects of white-collar bread lines in the ‘90s. But things are not that bad, or that simple. Service industries are being forced to restructure because, in plain English, they hired too many people and bought too many computers and didn’t get increased productivity out of either.

Service businesses have invested $100 billion a year in computers and information networks--$12,000 for each of 50 million white-collar office workers--writes Stephen S. Roach, economist of the Morgan Stanley investment firm, in the forthcoming Harvard Business Review.

And the more computers they bought, the more people they hired, creating armies of keyboard and screen workers for data entry, order taking and information storage work. “They are the file clerks in an age when there aren’t any files,” says Mitchell Fromstein, chairman of Manpower Inc., a temporary help firm.

But the businesses didn’t see costs go down or profits go up because of the computers. In economic terms, they didn’t see an increase in productivity--output per person or unit of investment.

So businesses have stopped buying so many computers--one reason for the current slump in that industry.

And, more seriously, lagging productivity in services--which has shown almost no increase throughout the 1980s--has held back the U.S. economy. The failure to create new opportunities, new products and services led eventually to the business slowdown we call the recession.

U.S. manufacturing industry, however, has proved a bright spot. These firms have increased productivity 4% a year since the 1982 recession, when they began restructuring in earnest. The best of them didn’t just cut jobs, they improved the process.

Plants such as General Electric’s in Louisville, Ky., Goodyear Tire’s in Lawton, Okla., Caterpillar’s in Peoria, Ill.--borrowing techniques perfected at Toyota and Honda in Japan--reduced backup staff and supervisors and gave employees on the assembly line the power to make decisions on production and quality. As a result, productivity rose.

Now U.S. manufacturers are adding jobs and exporting to the global market.

The message for service businesses is clear. Restructuring should mean figuring out how to deliver a quality product and service, not just cutting staff. “Cutting back ends up limiting your opportunities,” says Roach of Morgan Stanley. “A company should think strategically, of expanding market share, of entering new markets.”

To be sure, big companies are going to shrink their payrolls; there will be more contract or free-lance work. “Companies want flexibility,” says Manpower’s Fromstein.

But don’t look at that narrowly. Supercomputers doing geological work didn’t make for fewer geologists in the oil industry; it made for more exploration projects.

While television networks shrink, new stations and jobs are opening up in cable television. Even jobs in finance are going to grow. The Labor Department says finance will add about 1 million jobs in the ‘90s as more people saving for retirement will want assistance and advice.

When will the recession end? When the economy gets a boost, as it’s likely to do shortly thanks to the presidential election of 1992. “The Bush Administration will take (Federal Reserve Chairman Alan) Greenspan to lunch and push for lower interest rates now,” says a leading investment manager dryly.

But longer-term the economy should expand with increases in productivity, resulting from the restructuring of service industries--which carries more promise than threat. “Just because workstations do more work, doesn’t mean fewer jobs,” Fromstein says. “It means more work in an expanding economy.”