Business Services

The job recovery following the 1990-91 recession was fueled by growth in the service-producing industries. Less known is that the business services industry (SIC 73) has led all U.S. two-digit industries in net job creation since 1991. Between 1991 and 1998, business services created 3.46 million jobs; roughly one-fifth of all net new nonfarm jobs in the national economy.

Dynamic growth of firms in the business services sector of the economy has contributed to the pace setting overall job growth within Washington State in recent years. As in the nation, business services has led all two-digit industries in the state in net job creation since 1991. Between 1991 and 1998, this sector added 66,900 net new jobs, 17 percent of the growth in total state nonfarm employment.

Figure 1

Number of Establishments in Washington Business Services, 1981-1998
Source: Washington Employment Security Department

For more detail of above graphic

What are Business Services?

The business services sector is comprised of a wide array of services sold mainly to other businesses. Such services are essentially intermediate activities, providing inputs for the production of goods or other services, rather than directly serving final consumers. These service activities take on many different forms; for example, a business service occurs when one firm writes advertising copy for another firm, when a company leases an X-ray machine to a physician’s clinic, when a programmer develops a custom software application for a firm’s accounting department, when a personnel supply company provides temporary help on a contract basis to a manufacturing firm to fill expanded orders, or even when a bodyguard is hired for an executive. Although these examples hint at the variety of services captured by the industry, they do not convey the sheer number of activities performed by business services.

Table 1.

Industry Shares of Business Services Payroll Employment in 1998:
United States and Washington
Source: U.S. Bureau of Labor Statistics

Business services is divided into eight major groups: advertising; credit reporting and collection services; direct mailing, reproduction, commercial photography and graphic design; services to buildings, including cleaning and maintenance; miscellaneous equipment rental and leasing; personnel supply services; computer programming and data processing; and miscellaneous services, including security guard, news syndicates and photofinishing laboratories.

Two groups—personnel supply services and computer programming and data processing—dominate the industry in Washington; both combine for nearly three-fifths of business services total employment in 1997. Personnel supply firms perform relatively well-defined services; that is, bringing job-seekers to businesses with permanent and temporary openings. The computer programming and data processing includes a wider range of activities, from network design and custom software programming, to prepackaged software production and data processing services, to computer hardware rental and leasing and computer maintenance and repair. Miscellaneous business services, and its sub-industry--business services not elsewhere classified, also employs a significant share of workers, underscoring the eclectic nature of the business services industry.

How Big is the Business Services Sector?

Business services have a large and growing presence in both the national and Washington state economies. In 1981, 3.4 percent of the nation’s nonfarm employment were employed in business services industries. For Washington, business services captured 1.8 percent of the state’s 1981 total nonfarm employment. By 1998, business services’ share of total national payroll employment had grown to 6.8 percent; while in Washington, its share had improved to 6.0 percent.

With a 1998 total of 8.5 million workers, the business services sector is the second leading private employer (behind health services) in the nation. In Washington, business services has also become the state’s third leading private employer (behind health services and eating & drinking places) with a 1998 total of 151,100 workers.

The business services sector represents one of the most rapidly growing sectors in the nation’s sector as measured by the rate of job growth. Moreover, its growth has been consistently high over the past two and half decades, growing at an average rate of 6.3 percent per year from 1969 to 1997. Likewise for Washington, where business services has grown at an average annual rate of 7.5 percent for the period.

Table 2.

Average Annual Employment Growth Rates of Major Industrial Groups & Business Services, 1969-1997: United States and Washington
Source: U.S. Bureau of Economic Analysis

What are the Reasons Behind this Robust Growth in Business Services?

A variety of forces have been at work simultaneously to fuel the expansion of business services.

• Export markets. A pathbreaking 1985 study by University of Washington geographer Bill Beyers on the Puget Sound business services sector (and other producer services) found that local firms conducted a significant share (30 to 36 percent) of their business outside the area, primarily elsewhere in the United States. These findings have been confirmed by the latest Washington State input-output study. Business services firms in Washington sold 18 percent of their output outside the state or country in 1987.

• Import substitution. Import substitution occurs when local firms supply services that were formerly imported. Documentation is sparse, but it is likely that the replacement of services formerly imported has spurred growth of the local business services sector.

• Growth in intermediate demand. "Outsourcing" has become commonplace in many companies; where particular types of service work had formerly been conducted internally (such as accounting) is now procured from specialized business services firms.

• Technological changes. Advances in telecommunications, computer and information technologies have facilitated demand for business services. In a number of instances, new types of services have been developed and adopted within the marketplace. For instance, advances in information and computer technologies are often cited as the basis for new business service industry "products" such as prepackaged software and computer systems integration.

• Growth in consumer demand. With rising disposable incomes and technological advances, consumers have increased their purchases from business services sectors, including commercial photography, security systems, photocopying services, and prepackaged software.

• Changes in business "modus operandi". The mode of operations for businesses has dramatically changed in recent decades. The drive for improved productivity and increased competitiveness, particularly in manufacturing industries, has resulted in the dramatic growth in the use of temporary workers. Additional reasons why firms are using temporary workers include possibility of lower hourly costs per worker, increased flexibility, and the desire to screen potential permanent employees.

Job Quality and Business Services

While job creation alone is important, it is clearly better when the new jobs are also "quality" jobs. One can measure a job’s quality in a variety of ways; in this instance, average wage data are used to compare the quality of jobs in the various business services subsectors. Although the 1998 average wage for all business services workers was $69,522 and more than double the statewide average of $33,921, average wages for the various subsectors vary widely from a low of $13,128 for building maintenance workers to a high of $282,541 for prepackaged software workers. Prepackaged software employees are by far the highest paid workers in the state.

Table 3

Real Average Wages for Washington Covered Business Services Workers, 1981-1998 (1998 dollars)
Sources: Washington Employment Security Department,
U.S. Bureau of Economic Analysis

The distribution of average hourly wages for the business services industry also varies widely among the types of business services. Computer and data processing, for instance, has the highest concentration of $26 and more per hour jobs; nearly half of all workers had these high-wage jobs. In contrast, the highest concentration (55 percent) of workers for personnel supply services earn less than $10 per hour, substantially more than that for all nonfarm workers in the state (30 percent).

Figure 2

Average Annual Payroll by Business Services Sector in Washington State, 1998
Source: Washington Employment Security Dept.

For more detail of above graphic

Figure 3

Average Hourly Wages of Business Services Wage & Salary Employment, 1997
Source: Washington Employment Security Dept.

For more detail of above graphic

The labor force of business services is dominated by clerical, professional and technical, and service occupations. Common business services occupations within the clerical and administrative support group are secretaries, receptionists, typists, and clerks. Professional and technical occupations group includes computer engineers and programmers, systems analysts, designers, technical writers, and commercial artists. Principal service occupations correspond to specific business service sectors: security guards, janitors, and pest controllers.

Table 4

Occupational Profile of Business Services Workers in Washington,
1998 and 2008
Source: Employment Security Department

Focus on Personnel Supply Services

A singular feature of the U.S. economy during the 1980s and 1990s is the rise of the personnel supply industry. The personnel supply industry--which supplies temporary and continuing workers to client firms, is one of the fastest growing components of the business services sector. Although the personnel supply industry comprises 2.5 percent of total U.S. nonfarm employment, it accounted for roughly ten percent of the employment growth between 1991 and 1998.

Personnel supply services are composed of employment agencies—establishments (such as nurses’ and teachers’ registries and executive placing services) primarily engaged in providing employment services by assisting either employers or those seeking employment; and temporary help supply services—firms that supply temporary or continuing help on a contract or fee basis.

Workers in Washington’s temporary help supply sector increased by 500 percent between 1981 and 1998. This net gain translates into an average annual growth rate of 29.4 percent. As such, temporary help saw its share of Washington total nonfarm employment increase from 0.4 percent in 1981 to 1.9 percent in 1998.

Figure 4

Annual Personnel Supply Services Employment in Washington, 1981-1998
Source: Washington Employment Security Dept.

For more detail of above graphic

Evident in recent employment trends is the cyclical nature of the personnel supply industry. Temporary help supply is widely regarded to be a leading indicator of economy since firms tend to let go of temporary workers first as the economy weakens and hire temporary workers first as firms cautiously test a strengthening economy.

Figure 5

Annual Percent Change in Employment, Selected Business Services and Total Statewide Nonfarm in Washington, 1989-1998
Source: Washington Employment Security Dept.

For more detail of above graphic

What are some of the reasons behind this stellar growth in temporary help supply services? From the perspective of client firms, use of temporary workers provide firms with lower hourly costs (both wage rates and benefit levels) per worker, increased flexibility and lower adjustment costs in meeting production schedules, opportunity to screen potential permanent employees, and increased economies of scale and worker specialization. The labor market, however, involves both supply and demand forces. From the worker perspective, preferences for temporary employment include increased flexibility, compensating wage differentials, the ability to continue searching for permanent employment, and access to low-cost or free training and experience.

For many, the term temporary worker evokes the image of a part-time, female, clerical worker. In fact, temporary workers are involved in both full-time and part-time jobs, across a broad spectrum of activities. A recent survey of the temporary help firms conducted by the Washington Employment Security Department reveals a great deal about the state temporary workforce, namely who uses temporary workers, in what occupations and in what industries, and for how long. Results of the survey indicate that the broad services sector accounted for the greatest use of temporary help workers in Washington. Services, particularly those within high technology and health care, appear to be the driving force behind temporary help and its growth. Manufacturing is the next largest user of temps, followed by finance, insurance and real estate; and transportation, communications, and public utilities.

Table 5

Estimated Use of Temporary Workers by Major Industrial Sector in Washington, 1996
Source: Washington Employment Security Dept.

The occupational profile reveals that the greatest number of temporary workers are employed in administrative and office support positions including secretaries, typists, receptionists, data entry operators, and clerks. A significant portion of the temporary workforce is in the operatives and laborers grouping. Common occupations include general laborers, hand packers, freight handlers, and assemblers. Nearly a fifth of the temporary workforce are employed in the high-skilled professional and technical occupations, including engineers, engineering technicians and drafters, nurses, and employment interviewers. The latter cover the internal staff of temporary help agencies.

Average annual wages for the temporary workforce was $24,106 in 1998; well below the $33,922 state average. Workers employed within help supply services had higher average annual wages at $24,197. Six out of every ten temps earn less than $12 per hour. Nineteen percent of the temporary workforce earn more than $20 per hour.

Focus on Computer Programming & Data Processing

Thus far in the 1990s, Washington’s glamour industry is computer programming and data processing. Led by prepackaged software, computer programming and data processing employment has increased fourfold since 1988, making it the fastest growing industry in the state during this time period. In 1998, total employment of computer programming and data processing stood at 45,750 workers.

In a state whose fortunes have been largely tied to the aerospace and forest products industries, the emergence of high technology industries--led by computer programming and data processing, has diversified Washington’s economic base. In particular, prepackaged software has been a stimulus for growth when Washington flirted with recession during the early 1990s. With an average annual (1998) wage of over $176,000, the addition of 29,700 net new computer programming and data processing jobs between 1991 and 1998 helped boost the state out of its economic doldrums.

Figure 6

Computer Programming & Data Processing Employment in Washington, 1982-1998
Source: Employment Security Department

For more detail of above graphic

Computer programming and data processing services is comprised of establishments engaged in producing prepackaged software, offering custom computer programming services, providing integrated systems design and analysis, supplying computer processing and data preparation services, providing on-line retrieval services, offering on-site management services of computer and data processing facilities, renting or leasing computers and related data processing equipment, maintaining and repairing computers and peripheral equipment, or supplying computer-related services, including computer consultants and data base developers. With worldwide revenues of more than $200 billion and an annual growth rate of 13 percent, software--consisting of custom programming services, prepackage programs, and integrated systems design--is the dominant and fastest growing segment of the U.S. computer programming and data processing industry. In Washington, led by Microsoft--the world’s leading producer of personal computer software, growth of the software industry has been nothing short of phenomenal. The industry has added jobs more rapidly than any other sector in the state in recent years and has grown at twice the rate of the national software industry.

Figure 7

Annual Employment Growth in Computer Software:
Washington and United States, 1989-1998
Sources: U.S. Bureau of Labor Statistics and
Washington Employment Security Dept.

For more detail of above graphic

What are the reasons for this meteoric rise in software revenues and employment in the United States and Washington? Foremost, the market explosion in software was made possible by the serendipitous convergence of three technology developments: the spread of personal computers and computer networks in offices; a rapid drop in communications, and the appearance of the World Wide Web over the Internet.

Microsoft is generally credited with establishing the software industry in Washington State, even though there were already over 100 software firms in the state before Microsoft incorporated in 1981. The company expanded rapidly in the early 1980s by tying its operating system product, MS-DOS for IBM and IBM-compatible personal computers, to the sale of microcomputers themselves. Microsoft succeeded by developing a software product for virtually every computer need. Over the years, the company introduced several operating systems (e.g., DOS, OS/2, Windows 3.1 and 95) and a number of software applications (e.g., a word processor—Word; a project management program—Project; a spreadsheet—Excel; a graphical presentation program—PowerPoint; a desktop publishing program—Publisher; an electronic mail program—Mail; a Web browser—Internet Explorer; and a database management program—Access), making Microsoft the world’s top producer of software. Along with being the leading producer of software, Microsoft has become a major employer in the state and the firm has become a magnet for other software firms. The software industry in Washington has over 1,300 establishments, with most located within the Puget Sound region.

As significant as its recent employment growth, the software industry boasts the highest wages and salaries of any industry sector within the state. The 1998 average wage for software workers was $176,164, more than five times the state standard of $33,922. Growth in real (i.e., controlling for inflation) wages for software industry has been remarkable. Despite the 1993 correction, the average real growth rate between 1989 and 1998 is a remarkable 29.2 percent, compared with aerospace with less than two percent. The principal reason behind the substantially higher wages in software is the inclusion of exercised stock options along with wages and salaries.

Figure 8

Average Annual Worker Payroll in Washington Aerospace, Computer & Data Processing and Software,  1988-1998 (in $1998 dollars)
Sources: Employment Security Department;
U.S. Bureau of Economic Analysis

For more detail of above graphic

The software industry’s most important input is quality labor. The labor force for the industry is dominated by high-skill, high-wage professional and technical occupations. Over fifty percent of the industry’s labor force are in professional and technical positions, including computer engineers, programmers, systems analysts, and technical writers and editors. Clerical and office support occupations and managerial and administrative positions are also important within the software industry.

The software industry not only employs several thousand people in the state, but supports many other jobs in the state economy because of its indirect impact on business activity. According to the Microsoft Economic Impact Study, Microsoft’s employment impact in Washington extended well beyond the 9,900 people working for the company, since its employee compensation, other operating expenditures (e.g., printing of manuals, purchases of computers and peripheral equipment, communications expenditures, purchasing of advertising services), and capital expenditures (e.g., building construction) created job opportunities in other state businesses. The study found that the total 1995 Microsoft amounted to 43,530 jobs, implying that every Microsoft job supports an additional 3.4 jobs elsewhere in the state economy. Microsoft’s employment impact was found to be greater than most industries, including aerospace, because Microsoft in effect pumps more money per employee into the state economy.

 
Occupational Profile of Business Services

The labor force of business services is dominated by clerical, professional/technical, and service occupations. Common business services occupations within the clerical and administrative support group are secretaries, receptionists, typists, and clerks. Professional and technical occupations group include computer engineers and programmers, systems analysts, designers, technical writers, and commercial artists. Principal service occupations correspond to specific business service sectors: security guards, janitors, and pest controllers.

Do Business Services Have a Role in Export Trade?

Some observers have wryly asked how long an economy can grow by "taking in each other’s laundry," but the typical customer for many of these services are businesses, and often these businesses are not next door or even in the same town—the customer may not even be in the same state or country. [While many firms in the business services sector—for instance, commercial photography, prepackaged software, and security systems services—also have important consumer markets, the majority of these firms’ output are sold to other businesses or organizations.]

Prior studies have found that a significant proportion of the state’s business services are sold afar rather than locally, implying that growth in business services need not be derived from growth in local goods production. One set of studies looks at the proportion of a state’s business services employment. The observation that a state’s employment concentrates in a particular business service industry (that is, that there is surplus labor employed in producing a service), suggests that the state produces more than it needs and therefore exports the surplus. The most commonly used measure for business service export has been a simple index of employment concentration which looks at an industry’s share of total employment in a state. This share is put into index form by dividing by the industry’s share of total employment in the nation. An index number greater than 1 suggests that the state produces a surplus in the business service which is exported elsewhere. Accordingly, an index number of 1 would indicate little or no trade while an index number less than 1 would suggest that the state imports the service.

Figure 9

Index of Specialization: Washington Business Services, 1977-1997
Source: U.S. Bureau of Economic Analysis, Gross State Product Series

For more detail of above graphic

For business services, the index of employment concentration indicates that several business services are important export sectors in Washington. Prepackaged software, in particular, figures prominently as service exporters for the state. Additional analytical studies confirm these impressions that business services is an increasingly important export sector in Washington. The most recent Washington State input-output study found that nearly one-fifth of business services’ total 1987 output of $4.09 billion was exported out-of-state to customers in other states or foreign countries. Another report, Foreign Exports and the Washington State Economy, found that computer software was the state’s second leading foreign export (behind aerospace) in 1995 with sales valued at $2.49 billion. Other business services contributed an additional $244 million in foreign sales.

Outlook

In recent years, business services has been among the fastest growing sectors of the state’s economy, and this growth is expected to continue in the future. Business services employment will grow by an average of 8.8 percent per year between 1995 and 2005. Beyond 2005, business services employment is expected to slow significantly to an annual rate of 3.5 percent until 2020. However, business services will remain the fastest growing non-goods producing sector throughout the forecast period of 1995-2020. On the continued strength of Microsoft, computer programming and data processing is expected to lead all other business services in employment gains over the forecast period. Based on the robust growth rates of 7.8 percent during the forecast period, one out of every two workers in business service will be employed within computer programming and data processing.

The major caveat in the long-term forecast is resolution of the Microsoft antitrust case. Issues of contention include Microsoft’s Windows software monopoly and predatory business practices. Options range from a set of complex restrictions on business practices to decisive structural changes, even break-up. Each of these resolution options has regional and state economic implications.

Figure 10

Wage & Salary Employment Forecast for Washington Business Services, 1995-2020
Sources: Washington Office of Financial Management,
Washington Employment Security Department

For more detail of above graphic

Prepared by Chase Economics, Tacoma
For Washington Employment Security Department,
Labor Market & Economic Analysis Branch, Olympia, May 1999.
Published in agency’s Internet homepage, Industry series (www.wa.gov/esd/lmea)

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