Service Economy Emerges in the United States Summary

  • Last updated on November 10, 2022

In the aftermath of World War II, the United States economy evolved from one based on manufacturing to one based on customer service. Over the succeeding decades, manufacturing would continue to decline, as the service sector became a crucial source of jobs and investment opportunities.

Summary of Event

American manufacturing, emergent after the victory of Republican policies in the U.S. Civil War and symbolized by the smokestack, came to dominate the world’s economy, especially in the period after World War I. Big industry benefited from ample supplies of fuel and iron as well as from the protection of oceans and tariffs that stymied competition. Industry focused on the conquest of time and space, meaning railroads and later automobiles. After World War II, the development of a mass market based on consumer culture meant more factories, long production runs, well-paid labor, a higher standard of living, and abundant consumer goods. Economic systems;capitalism Capitalism Service economy, U.S. United States;service economy [kw]Service Economy Emerges in the United States (1960’s) [kw]Economy Emerges in the United States, Service (1960’s) [kw]United States, Service Economy Emerges in the (1960’s) Economic systems;capitalism Capitalism Service economy, U.S. United States;service economy [g]North America;1960’s: Service Economy Emerges in the United States[06320] [g]United States;1960’s: Service Economy Emerges in the United States[06320] [c]Business and labor;1960’s: Service Economy Emerges in the United States[06320] [c]Trade and commerce;1960’s: Service Economy Emerges in the United States[06320] [c]Economics;1960’s: Service Economy Emerges in the United States[06320] Kroc, Ray Jobs, Steve Wozniak, Stephen

By 2005, however, more than 81 million Americans worked in the service sector. About 80 percent of the gross domestic product (GDP) came from services and from the production of intangibles such as entertainment, education, health care, hospitality, and financial services. The symbols of progress were no longer smokestacks but computers, films, hospitals, and universities. Service industry factories look more like universities than like the industrial complexes of the early twentieth century that foreigners came to admire and copy.

How and why has this transformation occurred? No single dramatic event or product marked the emergence of services. The advent of the service economy can be tied neither to introduction of the mainframe computer after World War II nor to the rise of the personal computer in the early 1980’s, though both facilitated the standardization and hence expansion of services. Nor is it linked directly to the television set, which took mass culture from the theater to the home, or to the first McDonald’s restaurant, envisioned by Ray Kroc. Most of the services provided in the service economy had been provided for decades or longer. Professionals such as doctors, lawyers, and accountants had existed for centuries, as had colleges, restaurants, and hotels. It is useful to see the contemporary dominance of services as a culmination of a series of patterns that converged after World War II.

Part of the shift to a service economy in the United States came from the movement of manufacturing abroad, particularly to Latin America and the Far East, where labor cost far less than in the United States. Thus, for example, Japan came to dominate the manufacture of electrical appliances in the 1950’s and 1960’s. Later, as Japanese labor costs rose, the country moved to high-tech consumer electronic goods and captured about one-fourth of the American automobile market. Japan built its initial cost advantage into a reputation for solid performance in technology and quality. It is a good example of another country undergoing adaptation.

Asia became a primary source of clothing for the mass market by employing low-wage workers. Important in nurturing America’s service economy have been labor-saving technological changes that have not only increased manufacturing output but also created new jobs in the service sector for technicians and repair people.

The postindustrial impetus toward services has come in part from the changing demographics of the United States, particularly from the largest population explosion in the history of the United States, the baby boom. Born between 1945 and 1964, the baby-boom group became the best-educated and most affluent population segment ever. Affluence came both from education and training and from the first major movement of women into business. The advent of the two-career family was impetus for the conversion to a service economy.

The proliferation of services has also stemmed in part from government activities, especially the deregulation of the 1980’s, which brought competition into services. In financial services, for example, the Depository Institutions Deregulation and Monetary Control Act Depository Institutions Deregulation and Monetary Control Act (1980) of 1980 began erasing the distinctions between commercial banks, savings and loan associations, and credit unions. These organizations became more visible, more competitive, and consequently market driven. They opened more branches in attempts to reach more customers, and thus needed more employees.

Airline expansion stemmed from similar causes. Airlines used to fly when and where they were allowed by the Civil Aeronautics Board; now they fly wherever they can make money. Some competed through lower prices, but many offered improved service, which meant more workers.

Expansions of schedules added jobs. Court decisions and Federal Trade Commission regulations also helped bring services to prominence. For example, lawyers never advertised before 1978. Restrained by traditions reinforced by law, legal professionals “advertised” most commonly by running for office. The decision by the U.S. Supreme Court in Bates v. State Bar of Arizona (1979) Bates v. State Bar of Arizona (1979) Supreme Court, U.S.;freedom of speech permitted lawyers to advertise, and the legal profession expanded tremendously; cause and effect, however, is difficult to prove.

Perhaps the greatest changes in the nature of services have been their standardization and automation. Service-oriented businesses could grow from local firms serving local (sometimes protected) markets to global companies serving the world once they standardized. Traditionally, services are considered to have four properties that distinguish them from goods: they are intangible, heterogeneous (that is, they vary from producer to producer, and even a single producer may not be consistent), produced and consumed simultaneously (the creation of the haircut is when the hair is cut), and perishable. Given these traditional distinctions between services and goods, the lack of proprietary technology (all airlines can clothe employees in designer uniforms and serve drinks in flight), and short channels of distribution in services, the emergence of national and American firms serving worldwide customers can be viewed as nothing short of a major, if not revolutionary, industrial shift.

In a sense, services grew because of the use of information technology to affect time and space. Probably no single breakthrough has aided establishment of a national network of services more than has the personal computer. The personal computer Computers;personal computers revolution, brought on primarily by Apple Computer cofounders Steve Jobs and Stephen Wozniak in the early 1980’s, enabled what were once personal services to be conducted at a distance. Computer linkages, for example, made possible multisite and multinational operations in transportation and leisure that were previously possible only locally and on a small scale. Even the National Park Service and the Forest Service have online campground reservation systems. Similarly, the automatic teller machine (ATM) has enabled financial service institutions to break down geographical and time barriers, making it convenient to perform more banking transactions. Although a teller is not directly involved, each transaction does create work.

One major mechanism for the expansion of services has been the franchise, which has erased geographical barriers. From hotels to restaurants, from hair stylists to muffler shops, the “McDonaldization” of America—the national provision of standardized services—has been under way in the United States for some time. Franchises have erased geographical barriers, replicating successful local businesses on a national scale. They have simultaneously depersonalized many industries that still require personal contact between service provider and customer. Franchising also provides a relatively inexpensive and less risky means for entrepreneurs to get started, prompting more start-ups. Buyers know what they are getting when they purchase a franchise and do not have to invent a new product.


One location that may exemplify the shift from agriculture to industry, then to services, is Bloomington-Normal, Illinois. The twin cities typify the origins of many American urban areas as commercial and political centers rising out of farmlands. The arrival of the railroads in the 1860’s fostered the development of local businesses that served a national market, and they allowed for the distribution of goods from across the country in the local market. One of the biggest businesses was the railroad itself. This opening of markets made a national name in the 1880’s for Dr. Wakefield, a producer of pharmaceutical nostrums (one of the earliest branded and nationally distributed consumer goods), and in the 1920’s for the Williams Oil-o-Matic, a low-pressure oil furnace that boasted of making Bloomington the cleanest city in the United States.

Following World War II, however, railroad traffic declined to the point at which the railroads closed the repair yards that were the region’s largest single employer. Although townspeople worried that the changing economic base presaged economic decline, what followed instead was the burgeoning of services. Two of the largest employers were State Farm Insurance, begun to serve farmers in need of automobile coverage in 1922 and eventually America’s largest property and casualty insurance company, and Illinois State Normal University, a small state college built in 1857 to train teachers. It grew from an enrollment of three thousand in 1959 to nearly twenty thousand a decade later, as baby boomers sought an education. Although these two businesses predate the service revolution, their growth coincided with it. Furthermore, by 1963, more than 40 percent of the major companies in the area were less than twenty years old, indicating that new companies were forming in the new environment. In short, what happened to Bloomington-Normal was a major shift from agriculture to manufacturing, then from industry to services. This occurred elsewhere in the United States, and on the same scale. Other countries have followed.

In 1900, less than 20 percent of the American workforce was employed in white-collar jobs, while more than 30 percent derived primary income from farming. By 1960, nearly half of the workforce was white collar, while fewer than 6 million of the 74 million workers made their living from farming. By 1989, only 3 million of the 117 million workers derived their income from farming; 30 million held managerial and professional positions; 51 million claimed income from technical support and traditional service jobs in health care, food service, and household maintenance; and only 18 million were classified as manufacturing personnel.

The dominance of service in the American economy has made a major difference in the way people in the United States work and live. For example, most central cities have declined in population, while suburban areas have grown as workers no longer need to be near manufacturing centers. Service businesses tend to be “flatter,” with fewer levels of management than manufacturing organizations. This is a response to the simultaneous production and consumption of the service and allows service firms to be more responsive.

In the early 1990’s, manufacturing became more like service industries by providing more customized products on shorter deadlines. Customers have learned to expect high levels of service, whether from service firms or from manufacturers. The increase in computer and information technology and in the commercial use of the Web has only reinforced a trend long underway. Economic systems;capitalism Capitalism Service economy, U.S. United States;service economy

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Albrecht, Karl, and Ron Zemke. Rev. ed. Service America in the New Economy. New York: McGraw-Hill, 2002. Considered the definitive book on customer service and the service industry in the United States. This updated edition covers also the beginnings of Web-based commerce. Highly recommended.
  • citation-type="booksimple"

    xlink:type="simple">Bateson, John E. G. Managing Services Marketing: Text and Readings. 2d ed. Fort Worth, Tex.: Dryden Press, 1992. Most of the textbooks on managing or marketing services are compilations of readings. This contains an excellent selection of articles that illustrate the problems of managing service industries.
  • citation-type="booksimple"

    xlink:type="simple">Berry, Leonard L., and A. Parasuraman. Marketing Services: Competing Through Quality. New York: Free Press, 1991. Berry and Parasuraman are leaders in exploring the nature of services and particularly in defining quality services. This book distills many of their previous articles and advances an integrative framework in chapter 1 that ties together much of the previous literature.
  • citation-type="booksimple"

    xlink:type="simple">Hartley, Robert F. Marketing Successes, Historical to Present Day: What We Can Learn. 2d ed. New York: John Wiley & Sons, 1990. No student of marketing history should miss Hartley’s volumes on successes and failures. This volume describes J. C. Penney, the supermarket (King Kullen as pioneer), Korvette, McDonald’s, Kmart, Hyatt Legal Services, and Apple Computer, among others.
  • citation-type="booksimple"

    xlink:type="simple">Kasper, Hans, Piet van Helsdingen, and Mark Gabbott. Services Marketing Management: A Strategic Perspective. 2d ed. Hoboken, N.J.: John Wiley & Sons, 2006. An excellent textbook study and outline of service marketing, with a focus on the global market. Covers the fundamentals as well as anticipated future developments in the industry in North America, Asia, and Europe.
  • citation-type="booksimple"

    xlink:type="simple">Peters, Thomas J., and Robert H. Waterman, Jr. In Search of Excellence: Lessons from America’s Best-Run Companies. 1982. Reprint. New York: HarperCollins, 2004. This is the best-selling business book of all time. Provides an interesting framework for evaluating successful companies. Includes an updated author’s note.
  • citation-type="booksimple"

    xlink:type="simple">Ritzer, George. The McDonaldization of Society. 1993. Rev. ed. Thousand Oaks, Calif.: Pine Forge Press, 2004. Ritzer views the “McDonaldization” of society with a great deal of skepticism, as a trend enshrining homogeneity and mediocrity at the expense of variety, individualism, and excitement.
  • citation-type="booksimple"

    xlink:type="simple">Worthy, James C. Shaping an American Institution: Robert F. Wood and Sears, Roebuck. Urbana: University of Illinois Press, 1984. Worthy, an expert in management, served from 1938 to 1961 with Sears, Roebuck. He explains how and why Sears succeeded.
  • citation-type="booksimple"

    xlink:type="simple">Zemke, Ron, with Dick Schaaf. The Service Edge: 101 Companies That Profit from Customer Care. New York: New American Library, 1989. Although this book is largely anecdotal, it is readable and insightful. The examples range from Chicken Soup, a day-care center in Minneapolis, to such well-known giants as Wal-Mart and American Airlines. Half the book deals with principles, the other half with companies, arranged by industry. Includes a foreword by Tom Peters.

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Categories: History