In the age of automation, how can the services sector provide decent jobs?

Becoming rich as an industrial worker has become increasingly more difficult in recent times. Manufacturing employment in large parts of developing Asia has peaked at much lower levels than it did in the advanced world.

Given this so-called “premature deindustrialization”, can services be the new source of “good jobs”?

Since what constitutes “good” is subjective, not surprisingly there are different definitions. The International Labor Organization states that “decent work” is one that entails “dignity, equality, a fair income, and safe working conditions”. Similarly, the OECD refers to “quality jobs” based on earnings, labor market security, and the quality of the working environment.

Defining a “good job” by calculating the living wage—the amount that a person should earn to support a decent living standard for his/her family—makes it easier to get a handle on this concept and to compare across sectors and industries. A living wage rate ((based on an assessment carried out in 9 countries by my colleagues) assumes:

1. Minimum cost of living anchored to the poverty lines ($1.90/day for absolute poverty, $3.10/day for moderate poverty).

2. Family size of 4 (two adults, 2 children).

3. 48 hours of work per week.

4. Price differences within a country.

According to this definition, out of all workers in 9 countries included in the sample, 56% in wholesale and retail trade, 68% in transport, storage and communication services, and 73% in business services earn a living wage (at the $1.90 threshold). Compare this to agriculture, construction and manufacturing, where 28%, 61% and 60% of workers, respectively, earn a living wage.

This tells us that, yes, services do provide “good jobs” similar to construction and manufacturing sectors. However, construction and manufacturing jointly account for almost 32% of all employment, while trade, transport, storage/communication, and business services represent 21%.

Indeed, while recent evidence shows that employment in services-related occupations is growing faster than other sectors, it is not clear whether it’s growing fast enough to absorb new entrants to the labor market. The good news is that new technology, particularly digitization, could change this story.

Digitization has allowed for productivity and export growth in services that previously was not possible. This is the case with modern services such as finance, communication, software, legal, advertising, and business.

In short, digital platforms and e-commerce have the potential to raise productivity, employment, and wages in the services sector.

Research done for the Asian Development Outlook 2018 shows that technology creates new occupations, which tend to be mostly in the non-routine cognitive category. A detailed analysis of national classification of occupations reveals that two-thirds of new occupations in India and 85% in Viet Nam are in these types of services.

Furthermore, the probability of entering a new job is higher for workers already in services than those in manufacturing and agriculture, holding all other worker attributes constant. New work also pays better than old work: in India, new jobs pay 3.9 times more, and in Viet Nam 1.5 times more.
A case in point is the business process outsourcing (BPO) sector in the Philippines, where wages are almost 4 times higher than the average in the rest of the economy. However, BPO only accounts for 4.2% of national employment, reflecting the situation across the Asia Pacific region: despite the promise of “good jobs,” the ability to create these jobs in large enough numbers is questionable.

Part of the way forward lies in three ways government can help to create more good jobs in services.

First, they can provide a reliable supply of electricity and investments in infrastructure such as ICT (internet and broadband technology), both of which are key to business services. The IT-BPO sectors in India and the Philippines would not have grown so much without investments in ICT infrastructure.

Second, public policies should support innovation and technology adoption to foster entrepreneurship. High-income countries in the region like Singapore and the Republic of Korea can share best practices for others in the region.

Lastly, developing countries often lack an adequate supply of skilled workers. While new technology holds the promise of creating jobs in services, governments must invest in education and training to prepare their workforce.

For instance, despite the threat of automation, Philippine BPOs struggle to recruit workers for call centers, let alone for highly-skilled back-office services such as health and software development. A skilled workforce that is ready to take up new occupations is a must for countries in developing Asia.