Producer Services

Producer services are a set of industries that have markets primarily with businesses and governments, as opposed to markets mostly with households. These services include accounting, engineering, architecture, legal services, real estate, insurance, financial services, management consulting, advertising, design, administrative support services, temporary help, and research. In contrast, services such as retail trade, health care, education, repair of automobiles, and movie theaters have households as their primary source of demand. There are varying definitions of producer services; some include parts of transportation services and real estate and insurance. Clearly, some industries that are dominantly part of the producer services sector also have household markets, such as legal and banking services.

Producer services have grown rapidly in recent years, employing 40 million people in the United States in 2006, or approximately 23% of the civilian labor force. This number has risen from 9 million in 1969, when producer services accounted for 10% of the civilian labor force. The United States has a relatively high fraction of its labor force in producer services, compared with some other advanced economies and compared with most developing countries. In part, this growth is due to the tendency for open-market procurement of many of these services in the United States, whereas in countries such as Germany, there is a tendency for more of this type of work to be performed in-house in manufacturing and service industries.

Much producer service work is unstandardized, requiring face-to-face meetings between clients and suppliers and between subcontractors. For example, a firm developing architectural drawings for a client may need to meet on the construction site to discuss possible approaches to development. A management consultant needs to come to the offices of the client to assess their consulting needs. An engineering firm may need to work with an architect to conceptualize alternative ways for designing a particular structure—in conference settings, in conversations on the telephone, via e-mail, or on the ground at a project site. Frequently, this work involves documents that get revised numerous times as tasks or projects are conceptualized from preliminary visions to final articulations. While the Internet and digital means of communication have made it possible to manage these logistics more efficiently, the creative element in face-to-face meetings is still an important part of the work in this part of the economy.

There are various explanations for the relatively rapid growth of producer services as a share of total employment. One argument is that there is low productivity in these services compared with other sectors of the economy, partly because the ability to increase labor efficiency in work that involves face-to-face creative effort is restricted. Another argument is that firms have outsourced work that they previously undertook in-house. Every business faces the “make or buy” decision, and some argue that businesses have chosen to turn to an outside contractor who can supply producer services at a lower cost than can be provided in-house. However, evidence is mixed on this behavior, especially when there is a very careful definition of the type of services that were produced in-house versus those that are being procured in the open market. Research shows that another force at work is the increasing complexity of service provision, related to the development of new and more detailed or sophisticated service concepts, often driven by advances in information technologies intimately related to the production and delivery of producer services.

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