The Structural Logic and Historical Trends of Service Sector Expansion

The expansion of the service sector is not accidental, but a natural extension of industrialization as it progresses to a certain stage. From agriculture to industry, and then to the service sector, the evolution of industrial structure reflects technological progress, income increases, and changes in consumer preferences. In this process, marginal expenditure per unit of income shifts from "goods" to "people," and people's demand for "non-material" goods such as education, healthcare, tourism, cultural entertainment, and financial services gradually increases, leading to the rapid growth of the service sector.

In the United States, for example, the service sector accounted for less than 60% of GDP in the 1970s, but by 2020, that figure had exceeded 80%. Similar trends have been observed in other developed economies such as the UK, Japan, and Canada. China's service sector is also rapidly increasing, exceeding 55% in 2023 and becoming a major force in the three sectors.

This structural shift signifies economic "maturity," but it has also given rise to a series of new problems. Compared to manufacturing, the service sector often exhibits characteristics such as slow productivity growth, insignificant economies of scale, and weak cross-regional tradability, leading to concerns about weakening growth momentum in "highly service-oriented" societies.

The Low Productivity Trap and the Growth Paradox of the Service Sector

Why is it difficult for the service sector to sustain high growth? The core issue lies in the "productivity paradox." According to economist William Baumol's "cost disease theory," many activities in the service sector, such as healthcare, education, art, and retail, cannot achieve a sustained increase in "output per unit of labor" through technological innovation. The time a teacher spends per class is almost the same as it was 200 years ago; and the time a doctor needs to treat each patient cannot be infinitely reduced.

In contrast, the manufacturing sector possesses significant economies of scale and automation potential. In the industrial sector, capital infiltration, process optimization, and digital transformation can all significantly improve labor productivity. However, in the service sector, many jobs, such as nursing, legal counseling, and psychological services, rely heavily on human labor and personalized interaction; even with AI assistance, the fundamental labor input cannot be completely replaced.

When an economy becomes increasingly reliant on sectors with slow productivity growth, its overall growth potential naturally diminishes. This is one of the main reasons why a service-led economy is often seen as a "structural slowdown."

Hidden risks of changes in employment structure and income inequality

The expansion of the service sector is not merely a change in economic data; more profoundly, it alters the quality structure of employment. Broadly speaking, the service sector can be divided into two categories: first, "high-end services" such as finance, technology, law, and management consulting; and second, "low-value-added services" such as retail, catering, logistics, and home care.

The problem is that while the latter offers a large employment capacity, wages are low, job instability is poor, labor protections are weak, and it's difficult to accumulate family wealth. The rise of the "fast food worker class" in the United States and the expansion of the "informal labor population" in Japan are true reflections of this trend. At the same time, high-end service industries are forming "elite clusters," leading to a fractured middle class and an increased risk of class stratification.

The "dumbbell-shaped" structure of the service sector imposes a double constraint on consumption upgrading: on the one hand, the spending power of low-income groups is limited; on the other hand, the marginal propensity to consume of high-income groups is low. This consumption structure has a limited effect on stimulating domestic demand, further weakening the potential for endogenous growth in the service-oriented economy.

Declining investment rate and diminishing marginal return on capital

Economic growth depends not only on consumption but also on investment accumulation. In economies dominated by traditional manufacturing, companies continuously invest in physical capital such as machinery, equipment, and factories to expand production capacity and upgrade technology. However, as the economy gradually shifts towards a service-driven model, the logic of capital formation begins to change.

In the service sector, many businesses rely on human capital rather than physical capital, making it difficult to translate marginal returns into fixed investments. For example, a consulting firm expands primarily by hiring more employees rather than building new factories; a law firm, even with increased business volume, may not necessarily increase its physical assets. The result is a continuous decline in the investment rate and a weakening of the driving force for long-term capital accumulation.

Furthermore, while there is capital concentration in the digital platform service industry, it exhibits a strong "winner-takes-all" monopoly, with many marginal enterprises unable to attract investment due to insufficient competitiveness, further dragging down the overall return on capital. This phenomenon is particularly evident in countries with highly developed internet economies.

The lack of strong expectations for capital returns has not only suppressed private sector investment but also made it difficult for policy tools to achieve macroeconomic stimulus effects through the traditional "investment-driven" approach. This is also an important background for the "structural investment weakness" faced by highly service-oriented economies.

Does technological change in the service economy constitute a new growth driver?

Despite numerous structural bottlenecks in the service sector, there is also potential for breakthroughs. Especially against the backdrop of rapid development in digital technology, artificial intelligence, and the platform economy, some service industries are undergoing a "quasi-industrialization" reshaping: online education, telemedicine, AI customer service, and intelligent logistics are rapidly replacing traditional models, driving efficiency leaps.

For example, platforms like Amazon have optimized warehousing, manpower, and delivery in retail services through algorithmic scheduling and robotic automation; streaming services like Netflix and Spotify have restructured the entertainment industry's value chain through personalized recommendations and distribution mechanisms. These examples illustrate that the service industry can also achieve a "productivity miracle" under certain conditions.

However, this technological dividend is characterized by significant concentration and uneven distribution. The winners are typically large platform companies with technological and data resource advantages, rather than small and medium-sized entities in the service industry. Therefore, whether the overall service economy can transform into a new model of "high growth and high efficiency" still requires addressing key challenges such as innovation diffusion, the universal access to data elements, and the governance of platform monopolies.

While technological transformation may temporarily break the stagnation, whether it can systematically reshape the path of economic growth depends on the coordination and cooperation of institutional arrangements and redistribution mechanisms.

Case Study: A Comparative Analysis of Service Transformation Experiences in Germany and Japan

Germany and Japan, as two developed countries with deep industrial foundations and different paths to service sector transformation, provide valuable case studies for understanding the "stagnation risk" of a service-led economic structure.

Germany has long maintained its position as a manufacturing powerhouse, and even with the rising proportion of the service sector, its "industrial hub" remains highly active. Through the Industry 4.0 strategy and a strong ecosystem of SMEs, Germany has achieved synergistic development between manufacturing and high-end services. Its service sector is more reflected in "ancillary services" such as industrial support, engineering design, and precision finance, mitigating the pressure from the shift in growth drivers.

In contrast, Japan's service sector expanded rapidly after the bursting of its asset bubble in the 1990s, but it was largely concentrated in inefficient retail, elderly care, and low-tech catering. Coupled with a rigid labor market and slow diffusion of innovation, the expansion of the service sector failed to drive overall productivity growth, instead solidifying an economic ecosystem of "low growth, low prices, and low confidence."

The difference reveals a key conclusion: whether the service sector will become a "growth trap" depends not on its share of the economy, but on whether the internal structure of the service sector has the foundation for transformation to achieve "high efficiency, high technology, and a high value chain." In other words, "what services are provided" is more important than "what percentage of the economy are services."