Business-Related Service Providers: No Further Economic Development Expected

The economic situation in the business-related services sector has remained at a constant high level in the third quarter of 1998. Merely the expectations concerning the earnings situation has improved once again as compared to the same quarter a year ago. All other business factors have remained unchanged, both compared to the same quarter one year ago, as well as to the previous quarter. Hence, for the second quarter in succession, there has been no improvement in the economic situation. The slight stagnation in the business-related services sector has thus far had no impact on the employment figures of this sector. In particular highly-qualified workers have good prospects of getting a job. Low-skilled workers and graduates with vocational training on the other hand have more reasons to fear for their jobs. It also becomes clear that process innovations – i.e. the use of new and substantially improved technologies – exert a negative influence on the demand for low-skilled staff. These are the findings of a representative survey carried out by the Centre for European Economic Research (ZEW) in Mannheim, in collaboration with the "Verband der Vereine Creditreform" in Neuss, in September 1998. The business-related services sector encompasses tax advisors and certified public auditors, business consultants, architects, technical consultants and planners, vehicle renting, machine renting, forwarders and logistic firms, software providers, advertising agencies and waste management firms.

Detailed Background Information

The economic pauses in the current and the previous quarter are not to be interpreted as an indicator for an economic turnaround. Since mid-1996, this economic sector experiences a continuously powerful upward development. These two slowdowns are to be seen as the result of the still weak domestic demand.  The sustained turnaround expected for the overall economy throughout Germany has still not materialised. Investments in equipment have admittedly increased, yet the private consumption still lacks momentum. However, according to business-related service providers, more growth can be expected once again in the coming winter quarter: expectations for sales, earnings and prices are positive. Companies in the sector thus expect a continued upswing.

Slight Stagnation in Turnover and Demand

So far, the positive development of demand, which continued to register an upward trend since the beginning of 1996, has been the driving force in the business-related services sector. Even though the demand has now slightly weakened in the third quarter of 1998, it is still higher than in the same quarter of the previous year. The sales expectations have remained constant at a high level. The earnings situation is judged far better than in the third quarter of 1997. Since last spring, the positive earnings situation has also been felt in the labour market. Admittedly, in the third quarter of 1998, the labour market showed no signs of further improvement; however, the number of firms that hired staff once again outweighs the number of firms that released staff.

Situation in Eastern Germany Improved

Business-related service providers in Eastern Germany showed a trend towards moderate improvement. Expectations concerning sales and earnings improved in the third quarter of 1998. Nevertheless, the majority of business-related service providers in the new federal states still maintain a rather sceptical stance regarding their economic development. The employment prospects remain negative in the Eastern German business-related services sector. Due to its strong dependence on the construction industry, there are no signs of a sustainable recuperation in the new federal states. Despite improvements in general economic conditions in the first half of 1998, the German construction sector has still not recovered.

Problem Child: Waste Management Sector

Due to the weak economic situation of the building industry, architects and technical planners continue to be the problem children among the business-related service providers. Since the beginning of the year, the waste management sector, which struggles with considerable overcapacity, has likewise been caught in a downward trend. Software providers and business consultants continue to enjoy the economic boom triggered off by the turn of the millennium and the introduction of the Euro. Forwarders and warehousing businesses also develop very positively.

Poor Labour Market Opportunities for Low-Skilled Workers

Especially university graduates benefit from the currently favourable employment situation in the business-related services sector. By contrast, there is less demand for low-skilled workers and graduates with vocational training. On the back of the favourable economic conditions, for the first time since the launch of the ZEW/Creditreform business surveymore low-skilled staff was hired than released in the business-related services sector between autumn 1997 and autumn 1998. In the period between 1995 and 1997, especially low-skilled jobs were cut, whereas university graduates experienced employment increases over the whole period. The prevailing differences concerning the economic situations of the individual industries in the business-related services sector also make their presence felt in the varying employment prospects depending on the qualification. Architects and technical planners, for instance, generally scale down workers of all qualifications. The same goes for Eastern German business-related service providers. Software providers and business consultants mainly seek university graduates, while low-skilled workers merely have good employment prospects in the forwarding industry as well as in machine and vehicle renting.

Employment and Innovation

How does is happen that the trend goes towards an ever-higher qualification profile for employees, not only economy-wide but also in the business-related services sector? Many economists assume that innovations have a positive effect on the demand for highly-qualified labour and a negative effect on the demand for low-skilled labour. This correlation is especially true for process innovations, i.e. for the use of new and substantially improved technologies. The ZEW/Creditreform business survey shows that the introduction of process innovations causes a greater demand for highly-qualified labour, while it exerts a negative influence on the demand for low-skilled staff. However, process innovations – i.e. the introduction of new substantially improved technologies – have a positive impact on the overall staff situation. Obviously, process innovations cause an increase in demand for business-related services, which leads to a greater demand for employees of all qualifications.

Dissemination of Innovation

Whereas only half of the firms in the business-related services sector are engaged in innovative activities, about 70 per cent of business-related service providers have implemented a product innovation in the past 12 months. Software providers and business consultants were particularly active in this regard, while architects and technical planners were rather passive. Process innovations are even more widespread than product innovations. Almost 80 per cent of business-related service providers have implemented such innovations. Concerning this matter, vehicle renters and waste management firms are below the average, while the remaining industries in this sector do not display any significant differences in this respect. With regard to innovation activity, there are no disparities between East and West Germany.

Diffusion of PCs

Particularly process innovations frequently involve the implementation of new technologies, especially of IT equipment. 79 per cent of work spaces in the business-related services sector are equipped with a PC. With 64 per cent, the share of work spaces with a PC is far lower in the new Eastern federal states than in the Western federal states, where the share makes up 80 per cent. More than 85 per cent of software providers, business consultants, tax advisors and certified public auditors, as well as advertising agencies are equipped with a PC. The lowest figure is reported for waste management firms with only one-third of working spaces being equipped with a PC. The proportion will continue to rise in the future, since almost two-third of the business-related service providers stated plans to invest in further PC workstations in the coming twelve months. Given the wide diffusion of innovations and the increased use of information technologies, the employment situation for low-skilled workers will further deteriorate. A high qualification is therefore the best insurance against unemployment.

Contact

Prof. Dr. Ulrich Kaiser, Phone: +49 (0)621/1235-134, E-mail: kaiser@zew.de

The economic survey of the ZEW and CREDITREFORM has been carried out quarterly since the second quarter of 1994.The random sample is frequently refreshed by start-up companies. The results of the survey are published in the ZEW Services Sector Report. In addition, we provide this report on the internet as a special service at www.zew.de in the “ZEW aktuell” section.