Are global supply chains creating new service jobs?

Takaaki Kizu, Stefan Kühn and Christian Viegelahn are economists with the ILO Research Department.

Globalization has radically altered the way things get manufactured. Increasingly, manufacturing goods are created with inputs from all over the world, through a complex web of production that links workers and companies from different sectors and countries. In particular, the services sector has become an ever more important input provider to this production process, a phenomenon that some economists refer to as the “servicification of manufacturing”.

The increasingly globalized production and the rising importance of services in manufacturing goods production have led to a boom in related service-sector jobs in global supply chains. That’s a topic we explored in a new research paper entitled “Linking jobs in global supply chains to demand”. How big is this phenomenon, why did it happen and what are its implications for the global economy?

Here’s what we found in a nutshell:

Services jobs are an integral part of the global supply chain for manufacturing

Cars, washing machines and mobile phones are produced globally. The production of these goods does not only require parts and materials as inputs, but also relies heavily on services such as software development, product design or marketing. These and other services are hence important inputs to the global supply chain for manufacturing goods. The demand for these services by manufacturing companies creates jobs for workers worldwide. These jobs may be either located in-house (within the manufacturing company itself) or outsourced to companies that are specialized in these services.

The number of jobs related to the “servicification of manufacturing” has been growing much faster than the total number of jobs in global supply chains.

More service tasks are required to make and sell things than before

The “servicification of manufacturing” may sound like a highly complex idea, but in fact, it simply refers to the increasing number of services tasks required to produce a manufactured good nowadays compared with decades ago. Technical advances and consumer preferences for sophisticated products imply that a larger part of the value of a manufactured good is derived from services. Firms may use services to differentiate their products from their competitors. For example, successful product development relies on an analysis of customer preferences, which is the work of data analysts. Services can hence be important for manufacturing firms to remain competitive in the market.

The number of services workers in global supply chains increased rapidly

In 2011, 96.6 million services workers contributed to the global supply chain for manufactured goods. This is almost twice as many as in 1995.  These workers accounted for 4.5 per cent of total employment in the 40 countries analysed. 62.3 million of these workers were located in emerging economies, while 34.4 million workers were located in advanced economies. The number of jobs related to the “servicification of manufacturing” has been growing much faster than the total number of jobs in global supply chains.

service-chart

Both developed and emerging economies are affected by the boom in new services jobs

This is being seen throughout the world. The improved tradability of services means that they can be outsourced to providers offering the best price-quality trade-off. This, in turn, means that services jobs related to the global supply chains for manufactured products exist in both advanced and emerging economies, although they form a much larger share of total employment in advanced economies. However, services jobs linked to manufacturing supply chains in emerging economies are becoming more and more important.

Services can be globalized too

Firms are constantly striving to gain a competitive edge and increase profits through innovation and the introduction of new products, but also through cost reductions on their inputs. Servicification of manufacturing implies that an ever larger share of these inputs consists of services. Falling transportation costs, combined with improved IT infrastructure, communication and business processes allow firms to source the required services globally, searching for the best quality at the best price.

Servicification reshapes the world of work

The “servicification of manufacturing” creates new job opportunities for workers and new business opportunities and markets for services firms. Firms, however, also face increased global competition, which can jeopardize those workers in high-wage countries that perform services tasks that are less differentiated and relatively easy to outsource, such as certain back office activities. For consumers, servicification is a part of product innovation and can increase the value they derive from manufactured goods.

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