The Finnish Canary in the Service-Worker Coalmine

Libertarian Twitter trumpeted the publication of a new study this week on the positive effects of “service imports” on Finnish businesses. Like its cousin, manufacturing imports, service imports move companies to import the skills of service workers or export tasks abroad. The study finds these shifts increase firm competitiveness and accelerate demand for higher skill levels among technical workers and managers.

It is important to understand why free-traders were so enthusiastic in their reception of the study. The authors examined the impact of service imports on the Finnish economy between 2002 and 2012 and analyzed employment impacts in the manufacturing and services sector. They also looked at the employment outcomes by worker education level and occupation (see chart below). They found that service imports had increased 300 percent over the 10 year period to about 5 percent of total Finnish GDP. The authors put this growth in context by noting that the so-called “China Shock” on the U.S. manufacturing sector was about 2 percent of GDP. In other words, over the 10 year period of the study, the Finnish labor market experienced a massive influx of overseas service-sector and service-occupation talent.

For service sector firms, the effects of service imports were quite positive as the value of firm assets and the amount of exports grew, and firm “survivability,” the rate at which companies remain in business rather than close, improved as well. Service-sector employment also jumped, especially for higher-end jobs. Imported service skills were associated with higher demand for all types of workers in the service sector (whether goods or service producing), with the notable exception of low-skill jobs held by individuals with low levels of education. The greatest growth associated with service skills imports were medium-skilled professionals who added a total of almost 15,000 jobs, which the authors attribute to increased need for communication, management, and coordination among a more dispersed workforce and customer base. In the service-import world, the “winners” – more highly educated and agile workers – keep winning.

These positive effects were almost entirely absent in the manufacturing sector. By education level, the number of low- and medium-skill positions shrank by 28,000. The manufacturing sector lost 21,000 goods-producing jobs and 10,000 service-producing jobs. Medium-skill manufacturing professionals also saw a reduction in positions. Only highly skilled manufacturing technical workers and managers saw workforce opportunities expand. In other words, the Finnish manufacturing workers – whether oriented to goods or services production – bore the brunt of service imports. This was especially true of those workers involved in routine, manual tasks. Highly skilled workers in the manufacturing sector benefited as companies reinvested in the activities that boost firm competitiveness, such as research and development, engineering, legal support, and management.

So, what might this all mean? First, and most importantly, it suggests that the effects of globalization are going to continue to be felt for years to come as previously immune service-sector and service-occupation employment is exported to cheaper and equally skilled workers beyond national boundaries. Richard Baldwin, author of The Globotics Upheaval: Globalization, Robotics and the Future of Work, argues that even higher level tasks like accounting and law may ultimately prove subject to export as broadband internet spreads and advanced communications technologies like “hologram meetings” begin to take hold. Baldwin calls this new class of workers the “telemigrants” who will have no need to cross borders to do their jobs. Some of the policy tools currently in vogue for boosting reliance on domestic labor supplies, like immigration restrictions and tariffs, will be largely ineffective in countering these innovations.

What’s also evident from the study is that, as with previous rounds of automation and trade expansions, service-sector and service-task shifts are hitting low-skill workers first and hardest. In the Finnish example, the researchers found that “clerks, personal and protective workers, salespersons and customer services clerks” saw jobs eliminated due to skill imports. They also point to increased vulnerability in activities such as transportation, cleaning, and basic back office tasks, especially in the manufacturing sector. The premium on education and skills will continue to rise pointing to the need to find ways of supporting Education, training, and continuous skill development are the keys to future workforce relevance.

Of greatest importance in this evolving service occupation economy, the authors maintain, is “an increase in the use of interactive tasks” (i.e., management and customer relations) and an “increase in non-routine tasks.” This means there will be a growing premium for people who can work with other people and think on their feet in solving bespoke, moment-to-moment workplace problems which cannot currently (or maybe ever) be automated - even using artificial intelligence. As I’ve argued here, here, here, and elsewhere this will require workers to develop strong “implicit” or “soft-skills” that facilitate social relationships rather than betting exclusively on the technical skills imparted through formal education and job training programs.

Economic transformations are always difficult, and the reshaping of the service sector and service jobs will be no exception. The real question is whether we have the imagination to get in front of these challenges and reform public programs to improve access, relevance, and responsiveness to worker education and training needs. After decades of experiencing what can go wrong in this process, it’s time to start doing something right.

Brent Orrell is a resident fellow at the American Enterprise Institute where he conducts research on workforce development, criminal justice reform, and social theory.