Local and National Concentration Trends in Jobs and Sales: The Role of Structural Transformation

Michael Spence and Belinda Azenui note that labor productivity between the tradable and non-tradable sectors started to diverge in 1998, and by 2021 per-employee value-added in tradable sectors was nearly double the non-tradable sectors.

Description automatically generated “…Value-added per employee is a measure of labor productivity. In America’s tradable sector, it has risen steadily over the last two decades in both manufacturing and services, reaching roughly $185,000 (in chained 2012 dollars) in 2021. Over the same period, productivity growth in this sector averaged nearly 3%. The non-tradable economy [net government] is just 0.57% per annum over the last 20 years. This reflects below-average productivity levels and, in most cases, low-to-moderate productivity growth in the large-employment sectors. There was not always a large gap between the tradable and non-tradable sectors. On the contrary, as the chart shows, labor productivity was about $100,000 across the economy in 1998. But by 2021, after more than two decades of steady divergence, per-employee value-added in the tradable sector was nearly double the level in the non-tradable sector….”

Michael Spence and Belinda Azenui, “American’s Widening Productivity Gap,” Project Syndicate, February 6, 2023, https://www.project-syndicate.org/commentary/us-productivity-growth-non-tradable-sectors-labor-shortages-by-michael-spence-and-belinda-azenui-2023-02?barrier=accesspaylog

America’s Widening Productivity Gap

MILAN/GRANVILLE, OHIO – The United States has a productivity problem, though one would never know it from looking only at the industries producing goods and services that are traded internationally. Because these goods and services account for only one-third of GDP and slightly over 20% of employment, as is typical for a developed economy, it is important also to consider the non-tradable sector that comprises the remaining two thirds of the economy.

The economy’s tradable sector comprises agriculture, forestry, fishing, and manufacturing – the production of goods, as either final or intermediate products – which in 2021 accounted for one-third of tradable value-added. The tradable sector also includes services such as research and development, consulting, information, and much of finance. Taken together, services account for about two-thirds of tradable value-added – a share that has increased over the last two decades.

Value-added for a firm or industry is calculated by subtracting purchased inputs like energy and intermediate products – excluding labor and capital – from total sales in dollars. It can be understood as the value created by the combination of labor and capital. That value is then captured as income for the labor (forming the upper limit on the average compensation of employees in the sector) and returns for the owners of the capital.

Value-added per employee is thus a measure of labor productivity. And, in America’s tradable sector, it has risen steadily over the last two decades in both manufacturing and services, reaching roughly $185,000 (in chained 2012 dollars) in 2021. Over the same period, productivity growth in this sector averaged nearly 3%. If this had been true of the non-tradable part of the economy – including large-employment sectors such as government, health care, traditional retail, accommodation and food service, education, and construction – nobody would have to be worried about productivity.

There is no good way to measure government productivity, because markets do not price the value created by services that are generally not sold. For accounting purposes, value-added for the government is measured by the costs of labor and capital, the assumption being that democratic collective-choice mechanisms will eliminate services whose costs exceed the perceived benefits. But that approach does not provide much insight into productivity: the fact that value-added per government employee has grown very slowly – by 0.25%, on average, over two decades – just means that, on average, labor and capital costs grew at roughly the same pace as employment.

For the rest of the non-tradable economy, however, we can measure productivity growth, and the results – based on industry-specific data from the Bureau of Economic Analysis for employment and real value-added (in billions of chained 2012 dollars) – are very different than the tradable picture and far from rosy: just 0.57% per annum over the last 20 years. This reflects below-average productivity levels and, in most cases, low-to-moderate productivity growth in the large-employment sectors.

For example, in 2021, hospitality employs 12 million people, has value-added per employee of $41,355 – less than one-third of the $130,000 national average – and productivity growth of 0.26%. The health-care and social-assistance sector employs 20 million people, with value-added per employee of $73,624 and productivity growth of 0.71%. For construction, the figures are 7.6 million, $87,425, and -1.21%, respectively.

There was not always a large gap between the tradable and non-tradable sectors. On the contrary, as the chart shows, labor productivity was about $100,000 across the economy in 1998. But by 2021, after more than two decades of steady divergence, per-employee value-added in the tradable sector was nearly double the level in the non-tradable sector. Chart, line chart

Description automatically generated By definition, there is no external supply or demand in non-tradable sectors, and thus no external competition or specialization. These sectors must therefore be supplied by domestic and even local entities. Put simply, the supply and demand side must match.

Today, however, many non-tradable parts of the economy – including all the large-employment ones – are experiencing labor shortages. This is partly because factors like stress, safety issues, low compensation, and lack of flexibility are driving workers away from these jobs. But skills gaps are also playing a role. Given this, removing barriers to the acquisition of higher-level skills and incomes is a critical component of any structural-transition agenda.

Demand for health care, hospitality, and construction services is not going to drop. So, labor-supply constraints may lead to higher wages and higher prices, raising incomes and measured labor productivity to some extent. But more must be done to boost productivity growth in low-productivity sectors, thereby mitigating supply constraints, which population aging is set to exacerbate.

Digital technologies have been an important driver of productivity growth in rapidly expanding industries. Given recent breakthroughs in robotics and artificial intelligence, there is every reason to believe this will continue. But progress in high-end services and manufacturing alone is not enough. These powerful technologies must also be applied in low-value-added, low-wage, and low-productivity-growth parts of the economy.

Given labor-supply constraints and economic shocks – linked, for example, to climate change and geopolitics – the case for productivity-boosting interventions is clear. Unless policymakers use a combination of investment and incentives to reverse negative productivity trends, the US will achieve modest growth, at best. Worse, the growth that it does attain will be highly uneven, excluding many from its benefits.

"...That means he could be earning about $72,000 a year from rides and between $1,200 and $3,600 a year from Cargo and Play Octopus, for a total of about $75,000. That’s before taxes, though, and doesn’t factor in expenses like gas, insurance and maintenance, which can add up to nearly $20,000 a year...."

Kathleen Elkins, "I spent a day with a full-time Uber, Lyft and Juno driver in NYC—here’s how much he earned in 9 hours,"CNBC, February 4, 2019, https://www.cnbc.com/2019/02/04/how-much-money-nyc-uber-lyft-and-juno-drivers-can-earn-in-a-day.html

I spent a day with a full-time Uber, Lyft and Juno driver in NYC—here’s how much he earned in 9 hours

Al Castillo, 33, drives full-time for Uber, Lyft and Juno in New York City.

He typically works six days a week, Monday through Saturday, for nine to 11 hours a day. And, as I saw when I spent a day shadowing him, he rarely takes breaks. After all, the more rides he completes, the more he gets paid, so “you want to be busy all the time,” he told me. “Our time is money.”

On this particular day, a Wednesday, Castillo worked about nine hours, 7 a.m. to 4 p.m., and earned $233 from 15 rides. Nine rides and $140 came from Lyft, while six rides and $93 came from Uber.

“That’s a good day,” he told me, especially considering he took more breaks than usual to accommodate my filming. On a normal day, he’ll bring home about $250 after 9-11 hours of work, he said.

Castillo gets paid per ride and his earnings depend on how long the trip is, how much distance he covers and whether or not there’s “surge pricing,” when demand for rides is high and prices for passengers go up. Surge pricing, or “prime time,” as Lyft calls it, tends to happen during rush hour, bad weather or if there’s a big event going on in the area.

He can also earn tips. While just 20 percent of passengers leave tips, he estimated, “it helps. Every money helps.”

The app doesn’t show how much the customer paid, Castillo told me — it just breaks down his take per ride. A mid-morning, 22-minute UberX trip earned him nearly $10: He earned a base rate (what you’re paid to start the ride) of $1.83, a time rate (what you earn per minute in your region) of $5.49 and a distance rate (what you earn per mile in your region) of $2. Total: $9.32.

Uber and Lyft both collect about 30 percent of all passenger fares, Castillo told me. Juno takes just 16 percent, but as an app it’s not as popular yet, he added. Sure enough, we didn’t get one call from Juno over the course of the day and, instead, flipped back and forth between Uber and Lyft.

Still, he has all three because, depending on what neighborhood he’s driving in, one app may be busier than the others. “People in Bed Stuy like to use Lyft,” he said. “If you’re in Queens, people like Juno.”

If Castillo earns $250 a day and works Monday to Saturday, that’s $1,500 per week, which comes out to about $6,000 a month. He earns an additional $100 to $300 per month by using Cargo, which pays him a monthly rate for selling products like snacks and headphones to passengers, and Play Octopus, which pays him to mount a tablet that offers trivia games and plays ads.

That means he could be earning about $72,000 a year from rides and between $1,200 and $3,600 a year from Cargo and Play Octopus, for a total of about $75,000. That’s before taxes, though, and doesn’t factor in expenses like gas, insurance and maintenance, which can add up to nearly $20,000 a year.

Besides expenses, a driver’s take home pay will also depend on where they’re located, as mileage and per-minute rates vary by city.

And some days, you’re going to get luckier than others, Castillo told me. On his best day, he took home $540 after nine hours of driving, thanks to surge pricing. One-fifth of that came from a single, lucrative trip to the airport: “It was snowing and it was ugly outside. It was like 5:30 or 6 p.m., peak hours. They paid me like $110.”

Another time, after completing a $20 ride, Castillo recalled, the passenger gave him “a $100 tip, because it was Christmas.”