The New Service Class

By John Greenwald

It sounds at first like another cruel tale from the world of corporate layoffs. Young IBM personnel specialist, 36, loses his job last July in cutbacks at the troubled computer giant. In dismay over leaving IBM -- the company where both his parents spent their careers -- young man plunges into the harsh job market. But there the miraculous happens: after a flurry of interviews, he is hired by Electronic Payment Services, a start-up Delaware company that processes credit-card transactions, for substantially more than his old salary. "I never knew how marketable I was," says Peter Dychkewich, the hero of this story. "But then I floated my resume, and the job I have now came up rather quickly."

His good fortune reflects the astonishing strength and diversity of U.S. service industries, which account for 70% of the country's economic activity. Even as manufacturers such as IBM and General Motors shed workers by the tens of thousands, service providers from banking to health care are taking on new employees. Just last week the Labor Department reported that service companies created 153,000 new jobs in October. That dwarfed the 40,000 positions that manufacturers added and helped reduce the unemployment rate to 5.8% -- the lowest in four years.

Not only does hiring by service firms represent nearly 90% of the 2.7 million jobs that the U.S. economy has produced this year, but many bear little resemblance to the low-paying gas-pumping and fast food-making positions that the word "services" has often brought to mind. Indeed, nearly half the new service jobs have gone to people with managerial, professional or technical skills, which has helped raise the average income of all service workers to close to the level of their manufacturing brethren.

Mark Strassman, the president of Don Richards Associates, a Washington-based firm that places middle managers and consultants in jobs, offers a useful illustration of the more elaborate ways in which the service sector has accommodated refugees from other parts of the economy: "There are so many complex choices in the mutual-fund world that you need an investment counselor," he says. "Computers change quickly, so you have to hire consultants. Law firms need more attorneys and the Arthur Andersens and KMPG Peat Marwicks are adding more accountants."

Of course, the growing demand for professionals tends to mask the fact that millions of service workers remain stuck in jobs like waiter or sales clerk that pay little more than the $4.25-an-hour minimum wage. "All you have to do is hire two Goldman Sachs partners and you probably distort the average wage scale throughout the service sector," quips Bruce Greenwald, a management professor at the Columbia Business School.

Put more precisely, work throughout the $6 trillion U.S. economy is skewing more sharply than ever along educational lines. "We're getting the good jobs and the bad jobs, but the middle jobs we're losing," says David Wyss, an economist at the DRI/McGraw Hill consulting firm. "Take something like health care. It pays great if you're a doctor or a nurse, but in both cases you need a special degree. Without one, there aren't any good wage jobs in that sector. Those who aren't well educated are still flipping hamburgers at McDonald's or working as janitors."

While that may be grim news for many, the demand for skills provides great flexibility for managers and professionals who suddenly find themselves out of work in manufacturing industries. And even though many of the displaced may be less fortunate than Dychkewich, having to take pay cuts in their new positions, experts say they still stand to be handsomely rewarded by service- industry standards.

For manufacturing workers with less adaptable skills, the wage gap between industries is still daunting. Two years ago, the Pequot Indians opened their now-packed Foxwoods casino in Ledyard, Connecticut. So profitable have such gambling dens become that the Pequots could afford to staff the casino with 9,000 craps dealers, bartenders and other workers. But fully 56% of the nearly 1,300 employees who arrived after losing their jobs at local defense contractors like Electric Boat had to take pay cuts of at least $2,500 a year, according to Donald Peppard, a Connecticut College economist. One welder- turned-security guard was making $23,000 less than he had been earning. The workers who came from service jobs fared considerably better. Peppard found most earning at least $2,500 more than in their old positions.

The irony, of course, is that the layoffs that have bedeviled workers like those at Electric Boat are now providing job opportunities in service industries. Four years ago, accountant Greg Smith, 36, lost his $55,000-a-year position as an audit manager for a food-service firm that trimmed its payroll. After a succession of part-time work and other jobs, Smith joined the consulting firm Grossberg Co. in Maryland last summer as an auditor who sniffs out financial fraud for clients who have pared back their own accounting departments. Today Smith figures that between his salary and his cut of hourly billings, he has nearly doubled his old income. Because of downsizing, he says, "a lot of companies eliminated internal controls and positions, and that's worked in my favor because now these companies have to come to me."

The temporary-work sector is mirroring a growing sophistication in the upper ranks of the service economy. No longer solely providers of secretaries and clerical workers, these agencies now routinely send out doctors, lawyers, scientists and senior executives. As a result, the wage levels of temporary workers have been steadily climbing.

Such changes show up sharply at agencies like On Assignment in Calabasas, California, which places chemists, biologists and other scientists in temporary jobs. Thanks partly to layoffs at pharmaceutical companies, revenues at On Assignment have grown from $7 million in 1989 to an estimated $48 million this year. On any given day the company has 1,400 scientists working in jobs around the country for hourly wages of up to $35. (Pharmaceutical firms seem to thrive on outsiders. In New York City last week, an agency called the Cantor Concern swiftly filled a drug company's order for a specialist to help the firm decide whether to keep its in-house printing facilities. The pay rate: $2,000 a day.)

Meanwhile, the service sector itself is constantly generating new jobs. Realizing that personal computers were changing the way people work and play, Bob Zyontz and Larry Trink quit comfortable jobs in advertising agencies in 1986 to try to cash in on the new technology. Today their New Jersey-based firm, Princeton Direct, has $6 million in revenues and 14 employees engaged in the business of putting multimedia catalogs and other marketing material on diskettes and CD-ROMs. To keep up with the workload, Zyontz and Trink two years ago brought in computer expert and psychologist Jeff Friedman as a third partner.

Other new firms are helping to repair crack-ups in the financial industry. Tim Scala and Ken Jingozian left banking jobs last year to become self-styled derivatives investigators -- experts who advise clients on how to cope with the risks of those securities. Their timing was uncanny: soon after Scala and Jingozian created their New York City-based firm, Treasury Resources Consulting and Investigations, the Federal Reserve raised interest rates and sent the value of many derivatives plunging. Their phone has hardly stopped ringing. Says Jingozian: "The entire derivatives market has taken a quantum leap in complexity and sophistication. As a result, the ability of senior management and the back office to understand it has become more difficult."

As financial services have become more complex, companies have created new jobs requiring new skills. Fidelity Investments, the mutual-fund giant with more than $200 billion under management, has been opening as many as four new investment centers a year and bringing in about 100 people to staff them. Many are recent college graduates. The newcomers learn to field virtually any question about Fidelity products and can double salaries that start at about $20,000 within four years.

Retailers too are hunting for skilled sales personnel to explain sophisticated products. Home Depot is increasingly turning to design-school graduates to work in its new line of Expo stores, which will cater to customers building new houses. The company has already hired armies of carpenters, electricians and other craftsmen to take the angst out of shopping as the do-it-yourself chain has expanded to more than 300 outlets. Home Depot went farther afield to hire Larry Wells, 43, who lost his $60,000-a-year job as an Eastern Airlines pilot when that carrier went out of business in 1991. A do-it-yourself remodeler, Wells started as a floor salesperson in Atlanta for less than a third of his pilot's salary and has since become a district installation manager. Of his current salary he will only say that it is "certainly reasonable."

Some of the growth in service jobs has helped narrow the pay gap between men and women.While women made 34% less than men in median weekly earnings in ! 1983, the differential closed to 25% last year. That's partly because expanding fields such as health care and education have added numerous nurses, teachers and librarians -- jobs that are still mostly held by women.

In fact, the real divide in the U.S. economy is no longer between services and manufacturing, or even between men and women. The real split separates those with the education to get good jobs from those who lack it. Professor Michael van Biema, who has studied these trends at the Columbia Business School, predicts that in fields such as banking and finance "you will see many of the lower-end service jobs disappearing and being replaced by technologies." That's the bad news for some. The good news is that the same technologies will help wounded IBMers with management and professional skills make their way back up the pay scale.

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CREDIT: TIME Graphic by Steve Hart

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WAGE GAP

With reporting by Bernard Baumohl and Jane Van Tassel/New York, Sophfronia Scott Gregory/Atlanta and Suneel Ratan/Washington