Globalisation on Service Economies in the Uk

MacKinnon & Cumbers (2011) defined globalisation as “… the increased connections … in flows of goods, services, money, information and people across national and continental borders. “. The globalisation process may be decomposed into constituent processes in order to explain the impacts it has had, which will be discussed more later.

In turn, a service economy is one, or part of one, that is based on trade in services. A service is characterised by its intangibility, inseparability (the simultaneous production and consumption of services), heterogeneity and perishability over time and space (Regan 1963; Rathmell 1966; Shostack 1977; Zeithaml et al 1985, cited in Wolak 1998). Alternatively, services are economic activities which have no direct involvement with agriculture, mining, or manufacturing (OECD 2000).

Both macro and meso-scale impacts will be examined, starting with the macro; how the service sector as a whole has changed and how globalisation may have fundamentally changed the concept of what a service might be. Inequality as a result of globalisation will then be discussed with particular reference to the North-South divide, before examining market structure changes in terms of levels of competition in the service sector. Finally, meso-scale impacts will be considered, emphasising wage differences in the UK’s service sector.

Figure [ 1 ]: Percentage share of employment in the UK by sector, 1980-2008 Source: ONS 2009, cited in Faulconbridge 2010 The most profound impact has been the expansion of the service sector since the onset of globalisation in the mid-20th century. Figure 1 shows the increase in service employment from 1980 – 2008. Further to this, the %GDP generated by the service sector in this same period rose by approximately 20% (OECD 1996, cited in Julius ;amp; Butler 1998), closely mirroring the data in figure 1.

Explanation for this can be found in the international division of labour (IDL) that has occurred, in which agriculture and manufacturing have moved abroad to areas that have a comparative advantage over the UK in these sectors. Bryson (2008) referred to this process as the first global shift. The result is, as Figure 1 shows, that as agriculture and manufacturing decline in the UK, services ‘fill the gap’ that they have left behind. But what led to the first global shift?

Offshoring, the act of transferring (predominantly lower-skilled) operations to least-cost locations abroad, is a relatively new concept which has occurred with globalisation (Coe et al 2007). In particular, the rise of Transnational Corporations (TNCs) that are involved with multiple economic sectors, has created a pronounced IDL with East Asia as a dominant choice of location for outsourcing and offshoring. An example of this is Primark Ltd, a subsidiary of Associated British Foods plc.

Primark’s retail stores -the service part of its operations- are predominantly in the UK, but it sources its products (manufacturing that would otherwise be done in the UK) from East Asia (Primark 2011). This split encapsulates one way in which services in the UK have grown; at the expense of other sectors. Another explanation for the expansion is the liberalisation of the UK economy. As globalisation took hold, the view that free trade was the most efficient way to trade became dominant, a philosophy termed neoliberalism (Peet et al 2011).

The result was the formation of trade blocs and international organisations, for example the development of the European Union into what it is today. Flows of capital, labour and goods between constituents of the EU are uninhibited by tariffs and quotas, leading to a disproportionate increase of trade in services between the UK and Europe as the costs of trade fell. Evidence for how liberalism has worked is found in the ‘Big Bang’ in London. In 1986 the UK government attempted “the most rapid, and most comprehensive regulatory relaxation ever attempted by an exchange” (Clemons & Weber 1990: 233).

By abolishing trade restrictions such as the minimum scale for commissions and opening the exchange to outsiders, deregulation made the City more attractive as a marketplace, thus regaining its competitive advantage which it had lost to other cities such as New York (Clemons & Weber 1990). But as London’s capital-intensive sector grew in size and scale, so did the whole service sector. Wages were pushed upwards and created a mood of optimism (The Economist 2011), increasing the demand for lower-paid services such as cleaning, which are vital for a city to function (Sokol 2011).

As well as this, knowledge-based services such as accountancy or stock broking also flourished due to the increased volume of trade. Globalisation, more specifically the spread of technology, has also changed the fundamentals of a ‘service’. The earlier definition of service comes from literature from the mid-to-late 20th century, but more recently services have begun to transcend the characteristics of being inseparable and perishable, allowed by technological advancements (OECD, 2000).

An example of this can be found by examining the relatively new concept of internet search engines; it is a service produced at one point in time, yet it is available for use at almost any point in time and space, and by virtually unlimited amounts of people. Through technology, a whole host of different types of services have arisen, contributing to the expansion of the service sector. One particular new type of service is a business service (BS).

Shown in figure 1, the increase in employment in BS’s since 1980 is due to firms externalising and outsourcing work (Faulconbridge 2010), for example employing an accountant from a specialist accountancy firm rather than one in-house. Externalisation can be explained by the concept of the spatial division of expertise (Bryson & Rusten 2006, cited in Daniels et al 2008), which exploits the theory of comparative advantage for knowledge and expertise, at a meso-scale. As such, the demand for BS’s has increased, pushing forward BS’s prominence in the UK economy.

Another impact is the widening of the North-South divide in England, observed at least as early as 1988 (Green 1988), during the Thatcher government’s implementation of neoliberalistic policies. Evidence for this is found in much literature (Martin, 2010; French et al 2010; Mackinnon ;amp; Cumbers, 2011; Bryson, 2008), arguing that the spatial shift to services in the UK has been uneven; growth in knowledge and capital intensive services have been concentrated in the South-East and London, whilst labour-intensive (and therefore likely to be lower-paid) services developed in the rest of the UK, in particular the North.

This spatial inequality of the UK service economy can be attributed to a number of globalisation factors, but one of importance was the already-established spatial division of expertise between London and the rest of the UK. London had been the capital of the ‘workshop of the world’, thus established as a centre of knowledge, so as global markets became more integrated, and with events such as the Big Bang, the size and scale at which London’s knowledge economy operated increased disproportionately relative to the rest of the UK’s.

Further to this, the divide is exacerbated by exposure to world market forces that results from liberalisation. The financial crisis of 2007 which started in the USA caused the collapse of Northern Rock, RBS, and HBOS, major banks whose headquarters were based in Newcastle and Edinburgh. French et al (2010) argued that their fates signalled the end of Edinburgh and Newcastle as regional financial centres, thus further eroding the spatial equality of types of services in the UK. Indeed, Newcastle is increasingly being known as being a location of choice for outsourcing call centres (Richardson et al 2000).

Exposure to world markets was mentioned when discussing spatial inequality caused by globalisation. But exposure has also meant an increased level of competition in the service sector as TNCs expand their operations. An example of this has been the inward foreign investment in the supermarket industry by firms such as Aldi since 1989, creating competition and adversely changing the market structure from the view of domestic firms. Aldi hoped to create 1500 new jobs from 2008-2013 (Wallop 2008), implying that inward foreign investment has brought positive impacts for service sector employment.

On the other hand there are some service industries for which increased competition has had very few positive impacts, notably the coastal tourism industry. Blackpool’s local economy is based heavily upon services related to tourism, but with the advancement of travel technology exposing this market to international competition, the tourism sector has declined considerably in recent years (Singleton 2009) along with its related industries. Figure [ 2 ]: Index of rise in Gross Weekly Real Earnings for full-time males 1978 – 2008 Source: Lansley (2009)

Inequality can also be found at a meso-scale, in particular, the increase in the difference between the highest paid and lowest paid workers. Figure 2 shows that the rate of increase at the 90th percentile in the male wage distribution has been far higher than that at the 10th percentile. Although figure 2 does not isolate service wages from other wages, this rising inequality is still significant as services made up almost 90% of the UK economy in 2008 (figure 1). Van Reenen & Bell (2010) showed that the increase in the top end of the wage distribution has been mostly in financial services.

Much recent media coverage has indeed focussed on high bankers’ bonuses. The causes of this may be partially explained with by theories which do not fit in the context of globalisation, for example the decline of trade unions being responsible for lowering wages at the bottom of the wage distribution (Van Reenen ;amp; Bell 2010). However, in a globalisation context, offshoring plays a major role. Offshoring, as explained before, moves lower-skilled jobs to least-cost locations. This means that domestic labour supply is now competing with labour supply abroad. If labour can be supplied abroad for cheaper, the domestic price of labour (i. . UK wages) is depressed, thus explaining the low rate at which low-skilled wages are rising in the context of higher-skilled wages. Alternatively, domestic demand for unskilled labour has fallen, resulting in the lowering of unskilled wages (Slaughter ;amp; Swagel 1997) Furthermore, influxes of migrants, particularly from the EU, have contributed to the impacts on the labour market. Whilst skilled migrants help to tackle the UK skills shortage, unskilled migrants provide excess labour market supply; lowering unskilled wages and raising unemployment figures.

An alternative explanation is the migrant division of labour (Wills et al 2010), where foreign-born workers are more likely to take lower-paid jobs in the UK because the wage is still higher than what they might get paid in their home country, so driving down wages of lower-paid jobs in general. At the other end of the scale, the highest-skilled wages are being pushed upwards disproportionately because as global markets become more integrated, the rate of increase in global demand for skilled labour outstrips that of the global supply of skilled labour.

Evidence for the concept of demand outstripping supply comes from Richardson (2009, p. 326): “… even in times of relatively high unemployment, employers frequently cite skills shortages as one of the business difficulties that they face”. In conclusion, explanations of impacts of globalisation on UK services tend to be constituent processes of globalisation which are inextricably linked: the exposure to world markets due to trade liberalisation, offshoring, technology, and migration, but the impacts they cause vary greatly.

Explanations may also rely on economic theory, for example, the impacts on the labour market. Exposure to world market forces, such as the current Eurozone crisis, may mean London’s position within the UK is compromised like Newcastle’s and Edinburgh’s was. Additionally, as shown by the contrast between supermarkets and tourism in the UK, impacts and their explanations are industry-specific. However, it must be realised that globalisation offers only partial explanation of the impacts discussed. Politics, economics, sociology as well as wider geography play a fundamental role – in particular, UK governments have played a vastly important role in shaping outcomes of globalisation.