Service Sector Evolution in Spain: 1985-2008
Developments in the Service Sector
The service sector is determined by factors of supply, but also takes into account changes in demand. Key features:
- Expansion in the share of services in production at current prices: from 59% in 1985 to 67% in 2008 (out of €100 to be produced in the economy, almost 70% is from services).
- At constant prices, the change is only from 66% in 1985 to 69% in 2008.
- Services usually maintain their participation in real production and increase production in times of crisis because the public sector offers more services during crises.
- Services show significant growth in employment, from 56% in 1985 to 69% in 2008 (out of 100 people working in Spain, 69 are in the service sector).
- Most of the activities of the sector have been isolated from international competition.
- This performance of the services, regarding its expansion in terms of employment and nominal production, and maintenance of almost constant real production, has been analyzed from different perspectives:
From the Demand Side
It is assumed that services have an income elasticity superior to goods (more income leads to more spending on real services), which causes an increase in demand during economic growth.
This presumption is based on the idea that goods meet basic needs and services meet higher-level needs. Therefore, as we become more developed, a higher standard of living (services) increases and produces a shift in production and job changes to adapt to a new demand for services.
This interpretation can become incorrect, as shown by empirical evidence: the elasticities are not significantly different between goods and services and are also close to 1.
Changes are even further, and the expense of goods and services depends not only on elasticity but also on relative prices and technology.
From the Supply Side
Differences in productivity are key to understanding the evolution of tertiary activities:
From 1985 to 2008, productivity in agriculture was equal to 5% per year (annual growth rate), and in industry, it was 1.3%. However, in services, it has been standing at 0% from 1985 to 2008.
This low progress in productivity growth is due to the difficulty of incorporating technology. An identical increase in the production of goods and services requires a faster expansion of employment in services than in agriculture or industry, as the use of technology makes more sense in agriculture and industry than in the service sector.
If the increase in labor costs is equal in all three areas, the price of services will grow more than proportionally (because it uses more labor), which explains its growing importance in the GDP at current prices.
Sectoral Prices Confirmed
- Prices of Services: 5.3% from 1985 to 2008.
- Prices of Agriculture: 2.5% from 1985 to 2008.
- Industry Prices: 3.3% from 1985 to 2008.
All of the above leads to an empirical regularity in the behavior of the sector:
The growing share of GDP is due to its cost and involves changes in the forms of needs, such as substituting goods for services (for example, buying a music disc instead of going to a concert), causing a brake on long-term involvement in real GDP. Low growth in the productivity of services, compared to the need to increase production at a similar rate to other economic sectors, causes major needs for employment. However, there are differences between the different branches in terms of the use of labor and capital (for example, ICT).