Sectoral pattern of unemployment

The economy is often separated into three basic sectors:

1. the primary sector (the agricultural sector),

2. the secondary sector (the industrial sector), and

3. the tertiary sector (the service sector).

The agricultural sector is called the primary sector because economies must produce enough food for the population to survive before anything else can be produced. For most of the history of our species, most work was devoted to agrarian activities. It is only in recent centuries that the industrial and service sectors have become important. Employment in the primary sector has been steadily declining as a share of total employment. Employment in the service sector has been growing steadily as a share of total employment.

There are two fundamental concepts that have to be considered: the rate of technological improvement in each sector and the income elasticity of demand for the output of each sector. (Income elasticity = % change in quantity demanded / % change in income.)

In the agricultural sector, there has been a rapid pace of technological improvement but the income elasticity of demand is relatively low. Technological change results in increased output per worker and higher income in the economy. Yet, most people do not eat substantially more food when income rises. Thus, increases in productivity in this sector result in a need for fewer workers in this sector. Today, fewer than 3% of the population is employed in the agricultural sector of the U.S. economy.

The service sector has also been characterized by a fairly high rate of productivity growth. The income elasticity of demand for products in this sector, however, is substantially higher than for the agricultural sector. Increased output per worker has been accompanied by increased demand for the output of this sector as income rises (due to productivity increases throughout the economy). For most of this century, the demand for this sector's output was growing at approximately the same rate as productivity was rising. It is only in recent years that productivity has been growing faster than the demand for output in this sector.

In the service sector, productivity growth is relatively low but the income elasticity of demand for service sector output is relatively high. Productivity growth is low in the service sector because labor is an essential ingredient in the quality of the final product. Patients visiting physicians or dentists do not find the experience to be of the same quality if their physicians or dentists rushed through their examinations. Musical groups can increase their productivity in live performances by playing music faster, but it's not likely that this will be perceived as being of the same quality as a normal speed performance. Professors can talk faster to raise productivity, but this is also likely to lower the perceived quality of the service. While computers, improved diagnostic devices, and other changes may increase productivity in the service sector, it's likely that the overall rate of productivity growth will be substantially lower than in other sectors of the economy. As incomes rise (due to overall productivity growth), however, households tend to spend a growing share of their income on education, medical services, restaurant services, motel and hotel services, etc. Since productivity growth in this sector is unable to keep up with the growth in demand, the share of total employment in the service sector must increase.