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Servicing The Future

Employment trends show that the majority of tomorrow’s jobs will not be in manufacturing but in information technology, insurance, real estate, health, and other services. Jobs in the service sector have grown 100% or more in the last two decades; while other areas have stagnated or declined. Is public policy focused on this vision of the future?


April 4, 2002
Copyright © 2002 CARIBBEAN BUSINESS. All Rights Reserved.

How to make things work: Invest in developing a highly skilled work force and world-class infrastructure, and job creation–and economic growth–will surely follow

For several years, local business leaders have been coaxing the government to lean less toward seeking additional tax incentives for traditional manufacturing activity and more toward building up Puerto Rico’s physical and human infrastructure by improving the education of our workforce, developing world-class telecommunications, and adopting competitive venture capital and business laws.

"Look at some of the most robust economies or high-tech economies in the U.S.–places like Silicon Valley in California and Silicon Alley in New York," said Miguel Soto-Class, executive director of Center for the New Economy. "They’re all expensive places to do business, but they function without tax incentives because they provide two very necessary assets–skilled labor and world-class infrastructure."

Jose Joaquin Villamil, president of the Puerto Rico Chamber of Commerce, agreed, saying that more emphasis should be placed on primary and secondary education. Otherwise, he says it will be difficult to stimulate participation in technologically related disciplines in local universities.

A number of economists interviewed by CARIBBEAN BUSINESS indicated that this is the direction in which Puerto Rico needs to start moving, if it wants to spur future economic development.

"You can’t switch from a manufacturing industrial economy to a more knowledge-based economy overnight. And it’s a known fact that we can’t compete in manufacturing anymore," Soto-Class said. "Puerto Rico has many skilled professionals whom we’re not capitalizing on. We must accelerate or we’ll fall behind."

Estudio Tecnicos’ Juan Lara indicated that there has been a technological revolution in the past decade, which is expected to accelerate even more during the next five to 10 years.

"I expect to see a lot of technological change in finance, particularly in banking," Lara added. "Basically the application of computer technology is going to accelerate this revolution even more."

According to occupational employment projections compiled by the U.S. Bureau of Labor Statistics, eight of the 10 fastest growing professions are currently computer-related and will be so until 2010. Among these, some of the most sought after are software engineers, support specialists, data communications analysts, desktop publishers, database administrators, computer systems analysts, and software, network, and computer system administrators.

"Information technology is a key element to spurring economic development," Villamil said. "We should place emphasis on promoting locally based information technology driven firms."

Services lead the pack

The service sector has led job creation growth in Puerto Rico during the past two decades. And judging from the trend, the future of employment opportunities in Puerto Rico’s economy will continue to lie in services.

A 20-year trend analysis of Puerto Rico Labor Department statistics conducted by CARIBBEAN BUSINESS showed that the service sector as a whole and its various individual categories are the areas that have registered the greatest growth in job creation.

The CB analysis focused on the period from 1981 to 2001 because the Puerto Rico Labor Department began a new statistical methodology in 1981 based on sources of income. Elsewhere in this story, charts illustrate the numbers of jobs in various sectors over a 30-year period based on the Labor Department’s household surveys.

In a period during which the island’s population grew by 21.6%--from 3.18 million in the 1980 census to 3.87 million in 2000–several services sectors grew by more than 100%, while employment in manufacturing and government sectors remained stagnant and even declined.

The analysis comprised the six major sectors into which the island’s labor force is broken down–manufacturing, government, transportation & public utilities, construction, agriculture, and services, plus a more detailed breakdown of the services sector.

From 1981 to 2001, the number of jobs in health services, educational services, insurance & real estate, wholesale & retail trade, and other services all grew by more than 100%.

Employment in the transportation and public utilities sectors also grew by more than 100%, while hotel and hotel-related services and construction jobs almost doubled.

By contrast, for the past two decades, the only stagnant or declining sectors have been manufacturing and government.

Manufacturing in 1981 accounted for 154,100 jobs, a number that despite some fluctuation, remained fairly stable during the 20-year period, hovering around the 150,000-employee range. In the last three years, manufacturing employment has been declining, with that number reduced to 138,000 last year.

Several factors contribute to the changes in the local job market. A more globalized economy, free trade competition, and the phase out of corporate tax benefits by the federal government have served to demote Puerto Rico from its standing as a manufacturing powerhouse for stateside companies. (See related story on jobs evolution.)

Since 1999, manufacturing’s sharp decline has been largely due to increased outsourcing resulting from technical and institutional changes (lower transaction costs) and migration to low-wage regions, especially in apparel and labor-intensive assembly.

Not only has employment in the manufacturing sector remained stagnant for two decades, it is no longer the top private sector employer. The new private sector job generators have been insurance & real estate and wholesale & retail trade.

Service winners

Insurance & real estate–which in 1981 generated 87,100 jobs–has grown steadily over the last 20 years. It now accounts for 218,700 local jobs, a 151% growth.

Wholesale & retail trade has also experienced uniform growth on the island, going from 114,600 jobs in 1981 to 215,000 jobs in 2001, an 87.6% growth.

Jobs in the Health services industry went from 18,900 in 1981 to 51,100 in 2001, up 170%; educational services went from 15,500 to 30,200 for the same period, a 95% increase; hotel & tourism related employment went from 8,700 to 14,300, up 64%, while employment in other types of services saw an 80% increase over those 20 years.

Meanwhile, it was a mixed bag among the other sectors of the local economy.

Although employment in the transportation & public utilities sector went up 109% from 16,100 in 1981 to 33,700 in 2001, and 88.5% in construction for the same period from 38,300 jobs to 72,200, the situation in the manufacturing and agriculture sectors was different. Manufacturing employment went from 154,100 in 1981 to 138,000 in 2001, a 10.4% drop, while agriculture went from 40,000 in 1981 to 22,000 in 2001, a 45% drop.

Good things come in small packages

Slowly but surely, small business has replaced a combination of sectors to become the backbone of the island economy. It is estimated that small businesses employ 75% of the private sector workforce in Puerto Rico.

Businesses with fewer than 50 employees represent 94.7% of the establishments in Puerto Rico, according to the Puerto Rico Chamber of Commerce (PRCC). Of these, 92% employ fewer than 25 people.

PRCC figures for 1999 indicate that 68% of all new jobs in the private sector are in businesses with 50 employees or fewer, while 95.7% are in businesses with fewer than 100 employees.

Small businesses in Puerto Rico must navigate the sea of changes among big businesses. They deal with everything, from the entry of megastores and malls in the retail/wholesale trade and ever-growing franchising opportunities, to bank mergers resulting in fewer financing options and emerging technologies offering new opportunities, as well as fast-growing service industries such as telecommunications, tourism, health, and professional services.

"It is not healthy to categorize a business as small or mid-sized. What is important is for the business to generate a competitive base in order to become a global player," Villamil said.

The U.S. Department of Labor’s Bureau of Labor Statistics has drawn up projections for the U.S. mainland work force for the decade from 2000 to 2010. (See charts.) Projections indicate that the service sector will continue being the dominant employment generator in the economy, adding 20.5 million jobs by 2010.

Within the goods-producing sector, construction and durable manufacturing will contribute relatively modest employment gains.

Trends in the U.S. are roughly similar to what is happening in Puerto Rico with the exception being growth in the construction industry, which will probably continue being more dynamic on the island than its stateside counterpart. This is especially true for the housing segment because of the demographic trends on the island.

"Puerto Rico has much more new household formation [demand] as a percentage of total population than exists in the States because their population is much older," Lara said.

"There is a significant need for construction workers in Puerto Rico," said Jose Gonzalez Nolla, president of the Associated General Contractors of America’s local chapter. "Education must exist at all levels about the importance of this industry with regard to the progress that is necessary for the government to fulfill its agenda."

The U.S. Labor Department also projects that as employment in the service-producing sector increases by 19% in the States, manufacturing employment is expected to increase by only 3% for the period from 2000 to 2010. Health services, business services, social services, engineering, management, and related services are expected to account for almost one of every two non-farm wage and salary jobs added to the U.S. economy for the period. These sectors account for a large share of the fastest-growing industries.

Manufacturing growth isn’t fast enough

"I would expect to see employment in manufacturing declining over time–not as fast as it has in the last few years with productivity increases. The sector will grow but not fast enough to overcome that increase," said Lara.

For years, Puerto Rico has relied on a manufacturing-based economy. The local government is still seeking tax incentives such as the proposed amendments to Section 956 of the Internal Revenue Code to attract and keep manufacturing companies on the island.

But Soto-Class and others believe the government should start developing a new model for economic development that is not so reliant on manufacturing.

"The new economic development model should have a manufacturing component, but it should be more focused on high-technology manufacturing," Soto-Class said.

John Stewart, deputy executive director of economic analysis and strategic planning at the Puerto Rico Industrial Development Co. (Pridco), pointed out that Puerto Rico has competitive clusters in high-tech manufacturing.

"Nine of the top 10 prescription drugs sold in the U.S. in 2000 were made in Puerto Rico," Stewart said.

Jorge Belingeri, executive vice president of the Puerto Rico Manufacturers Association, agreed that focusing on high-tech manufacturing clusters is one way to keep Puerto Rico competitive in the industry.

"I see Puerto Rico as the axis for service and distribution, especially when the Ports of the Americas is completed," Belingeri said. "The Ports of the Americas will be a gigantic distribution center for international exchange."

High-tech manufacturing could be an important job generator in the future, but the fact is that the bulk of the manufacturing jobs on the island are mostly derived from labor-intensive industries. Most of the net job losses since October 1996 have occurred in labor-intensive textiles, apparel, leather, and canned tuna, according to statistics compiled by Pridco. Experts caution that electronics includes labor-intensive operations similar to apparel, which also have volatile, short product life cycles.

It will be difficult for Puerto Rico to continue to compete in any labor- intensive manufacturing. Low wage economies offer cost-effective alternatives to the island’s federal minimum wage and labor-friendly regulations.

The bright light in the local manufacturing picture is the pharmaceutical industry. Pharmaceutical manufacturing has added more than 4,000 jobs and industrial supplier manufacturing base has grown in the areas of plastics, metal parts, and printing. These can be directly related to specific skills and productivity levels in the local industry. Operating under federal standards works as a plus for pharmaceuticals, which must be U.S. Food & Drug Administration (FDA) compliant.

"Higher manufacturing productivity growth and relatively low prices for manufactured products reduce their share of the Gross Domestic Product," said Stewart. "Manufacturing prices have declined. Future job growth will depend on productivity growth relative to service."

Government must decrease jobs

Puerto Rico’s government payroll continues to grow and stymie the island’s economic development, according to experts interviewed by CARIBBEAN BUSINESS.

The government sector as a whole has experienced limited growth of 27,900 jobs, or 11% in the last 20 years. In 1981, it was responsible for 252,300 jobs. By 1997, this number reached 318,900 but has declined since.

Examining a breakdown to federal, state, and municipal levels, the greatest increase by far has been in municipal payrolls–increasing from 39,700 jobs in 1981 to 52,700 jobs in 2001.

"I would expect that the government sector will not continue to increase its payroll," said Lara. "I don’t see it as an issue of the government reducing its work force but more that other sectors become more dynamic and the primary job generators while the government’s position [as employer] declines in relative terms, not necessarily in absolute terms."

Stewart also believes the government will reduce its job-generating role.

"There are too many jobs in the government sector. However, due to demographic transition, many government employees will be retiring. What the government should do is not replace them," Stewart said.

One area that Soto-Class said could absorb government employees is the nonprofit sector such as universities or hospitals.

"It’s important for Puerto Rico to grow its nonprofit sector because of the immensity of the government’s payroll, which must be reduced," Soto-Class said. "People leaving the government are usually not highly skilled, so they can’t be transferred into other sectors of the economy very quickly."

Sowing the seeds of employment

Not nearly as prolific as it once was, employment in agriculture has decreased over the past six decades, but it remians a significant component of the island’s economy.

In the 1940s, the sector represented a third of the island’s Gross National Product (GNP). Now it accounts for 1% of the GNP, according to Agriculture Department statistics.

In 1981, the agriculture sector was responsible for 40,000 jobs. Since 1987, the number has been declining and is now at 22,000 jobs.

The Calderon Administration has pledged to increase agriculture production by 20% by 2004. To achieve this, a special fund was created to spur agricultural production. The objective is to help farmers market their products locally and off-island by utilizing foreign companies that have a presence in Puerto Rico. The effort is propelled by incentives granted to U.S. companies interested in helping local producers export their products.

Tourism is here to stay

Puerto Rico has a strong tourism sector and it is very labor-intensive compared to others.

Lara predicts tourism, which is already a big employer on the island, will continue to generate more jobs for the next five to 10 years.

"We should be more supportive of new development because it creates new jobs and opportunities," said Rick Newman, president of the Puerto Rico Hotel and Tourism Association.

While Soto-Class agrees it’s good for Puerto Rico to develop tourism, he is quick to point out that working at a hotel is not comparable to working at a software development center.

"Ten thousand jobs in tourism are probably less in terms of economic activity than 500 jobs in the high-tech field," Soto-Class said.

Puerto Rico has such a high unemployment rate–13.7% reported in January 2002 up from 11.4% for the same month a year ago–that it’s in the island’s best interest to have as many people employed as possible.

"Obviously, it’s better to have a job in a hotel than not have one at all. It’s not a question of choosing one over the other but of building a foundation for the future where the new generation can move into jobs, increase economic activity, and receive better wages," Soto-Class said.

This Caribbean Business article appears courtesy of Casiano Communications.
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