Tertiary sector of the economy

The tertiary sector of the economy is the segment of a developed economy that provides services to its consumers. A developed economy generally refers to a country with economic growth and security at a relatively high level. The tertiary sector is also known as the service industry.

In addition to the tertiary sector, there are two other types of industry in a developed economy. The primary sector is the raw materials industry, and the secondary sector comprises the goods production industries. As it develops, an economy’s major focus shifts from primary to secondary to tertiary industries.

Two main categories make up the tertiary sector of the economy. One category is composed of profit-earning businesses, such as financial industry companies. The other category consists of nonprofit businesses, such as public education.

By and large, the tertiary sector industries offer intangible products, such as banking, entertainment, retail, insurance, and tourism. This sector works with existing manufactured goods while offering better services to customers.

Background

The tertiary sector of the economy, or service industry, is the part of the economy that generates services instead of physical objects. All economic activity is divided into two wide-ranging categories: goods and services. The first two sectors of the economy provide goods: the primary sector refers to the extraction of raw materials, and the secondary sector refers to the production of goods. Examples of goods-producing industries are construction, agriculture, manufacturing, and mining.

Service industries include any type of business that does not create a tangible object. All financial services, as well as all professional services, such as medicine and engineering, fall under the service industry title. Also, all government services, including defense and law enforcement, and all wholesale and retail trade, are part of the service industries.

Developed countries are dominated by service-oriented economies. Less developed countries rely on primary sector activities, such as mining and agriculture.

History

During the twentieth century, the share of the tertiary sector in the world economy grew progressively. Instead of relying on the extraction of raw materials for consumption and sales, modern economies gradually switched to dependence on revenue from goods and services. By the early twenty-first century, more than one-third of the worldwide labor force were employed by the service industries, which contributed more than three-fifths of the global GDP (gross domestic product) (Encyclopedia Britannica, "Service Industry").

The rise of the service economy can be attributed to the mechanization of goods production. As machines took over many tasks traditionally performed by humans, a smaller workforce was needed to produce physical goods. That freed up workers to devote themselves to the labor-intensive tertiary sector. As a result, the service tasks of sales, management, distribution, and finance became far more important. At the same time, in countries with more developed economies, the workers had higher incomes and extra money to spend on services.

Industrialization and post-industrialization describe the shifts taken as economies develop. Industrialization refers to the change from the primary sector to the secondary sector, as incomes rise and people demand more consumer goods. Post-industrialization describes the change to the tertiary sector, as people’s demands become less physical, but they want to consume more services.

Overview

The three sectors of the economy form a chain of production, the result of which is finished goods or services. The primary sector involves acquiring raw materials, the secondary sector involves converting those raw materials into products, and the tertiary sector involves supporting the production and distribution process, as well as other services. There is an interdependence among the three sectors.

An expanding tertiary sector or service sector is a sign of higher living standards in an economy. Citizens of countries where the tertiary sector of the economy is robust enjoy leisure-based service activities, such as eating in restaurants and attending sporting events.

A growing service sector is a positive sign for societies. The service sector produces intangible goods, such as information services. Producing those services calls for more human capital. The need for more human capital raises the demand for educated workers, which induces countries to spend on educating their people; thus, a greater service sector helps society at large. Furthermore, the service sector is good for the environment, because service industries use up fewer natural resources than primary sector industries.

One drawback of a society that relies heavily on the service industries is the possibility of loss during financial crises. If the banking and financial sector becomes too large, worldwide economic problems and difficulty getting credit can cause a country’s economy to collapse. This is what happened to Iceland in 2008.

Another difficulty with the service sector is the complexity associated with exporting its services. Countries with robust service sectors might have to import all of their goods and have nothing to export. On a positive note, the Internet has eased the export of goods and services, such as IT support.

In general, economic recessions only lightly affect the service industry. Some service industries, such as management and engineering, reduce employment during recessions because those industries depend on project work, which is usually minimized during recessions. On the other hand, some service industries, such as health care, are not typically affected by recessions because people need health services on a steady basis.

An additional concern about the tertiary sector of the economy is the low wages of many service jobs. The US Labor Department’s 2009 Occupational Employment and Wages report showed that high-paying manufacturing jobs had rapidly disappeared as more manufacturers either mechanized tasks or moved offshore entirely. The report found that the occupations with the highest levels of employment were cashiers, food preparation workers, office clerks, cashiers, and nurses, most of which are low-wage positions.

From 1989 to 2009, jobs for fast-food workers increased by 43 percent, and child care employment increased by 68 percent. Neither of those fields produce enough income to support a family.

Proponents of the service-based economy say the domestic workforce will only benefit from a true service economy. Well-educated workers can combine their abilities with data and technology to bring the service economy to life while increasing the number of high-earning positions.

Bibliography

Buera, Francisco J., and Joseph P. Kaboski. "The Rise of the Service Economy." The American Economic Review, 102(6) 2009: 2540-69. Print.

Cheng, Dazhong. "The Development of the Service Industry in the Modern Economy: Mechanisms and Implications for China." China Finance and Economic Review 1.1 (2013): 3. Web. 2 Dec. 2015.

Encyclopedia Britannica. "Service Industry." Web. 2 Dec. 2015.

Gallouj, Faiz, K., Matthias Weber, and Metka Stare. "The Futures of the Service Economy in Europe: a Foresight Analysis." Sciencedirect.com. (2015). n.p. Web. 2 Dec. 2015.

Haksever, Cengiz, and Barry Render. "1.3. The Service Sector of the U.S. Economy:| the Important Role Services Play in an Economy." |FT Press. Ftpress.com. (2013). Web. 2 Dec. 2015.

Poole, Millicent E., and John C. Wood. Research Issues for the Service Sector, Particularly for Community Service Professions and Export Services. Perth, Australia: Business/Higher Education Round Table, 2013. Print.

Short, Doug. "The Epic Rise of America's Services Industry [CHARTS]." Business Insider. n.p., (2014). Web. 2 Dec. 2015.

Soubottina, Tatyana P. Beyond Economic Growth. Washington: World Bank, 2000. Print.

Wilson, Reid. "Watch the U.S. Transition From a Manufacturing Economy to a Service Economy, in One Gif'." Washington Post. n.pg., n.d. (2014). Web. 2 Dec. 2015.