Economic sectors and structural change

Think for a moment about the adults around you: perhaps your father works in a workshop, your mother in a bank, your uncle on a farm and your neighbour in a hospital. All four work – but their work could hardly be more different: one obtains something from nature, another advises customers, a third repairs machines and the fourth cares for people.

To make sense of this variety, economists divide all jobs and businesses into three broad groups – the economic sectors:

• 1st sector: obtains raw materials from nature
• 2nd sector: processes raw materials into goods
• 3rd sector: provides services for others

A memory aid in three words: extract – process – serve.

Reflection question for this module: Which sector do your parents or other people you know well work in? Keep this question in mind – by the end of the module, you will be able to answer it confidently.

1st sector (primary sector): obtaining raw materials from nature

This includes everyone who takes something directly from nature – plants, animals, timber, fish or minerals. Typical jobs and businesses include a farmer with dairy cows, a winegrower in a vineyard, a forester in a forest and a fisher on a lake. Mining belongs here too.

2nd sector (secondary sector): processing raw materials into goods

This is where raw materials are made into something – in industry, in the craft trades and in construction. Typical jobs and businesses include a mechanical engineering technician in a machinery factory, a baker in a bakery, a bricklayer on a building site and a joiner in a furniture workshop. Watch out for a common misconception: craft trades belong to the 2nd sector, not to services – what matters is that a product is made.

3rd sector (tertiary sector): providing services

Here, people do not manufacture anything: they provide a service for others. Typical jobs and businesses include a shop assistant, a bus driver, a teacher at a school and a nurse in a hospital – as well as banks, fiduciary firms, hairdressing salons and tourism.

What if a business does both? The bakery in “The simple circular flow of the economy” bakes bread (2nd sector) and sells it over the counter, perhaps even with a café area (3rd sector). Many businesses operate in several sectors at once. To classify them, it is best to look at each activity separately: does it involve extracting something, making something or providing a service?

Around 150 years ago, most people in our region worked in agriculture – the 1st sector. Industrialisation brought factories, and many people moved into the 2nd sector. Today, most people work in the 3rd sector, both here and in almost all wealthy countries. This gradual but enormous shift in employment from the 1st to the 2nd and then to the 3rd sector is called structural change.

Why did this happen? Three reasons are closely linked:

• Machines and technology: Today, a tractor does fieldwork that once required a whole village. Later, robots and computers also took over many tasks in factories. Machines therefore replace human labour – first in the fields, then in factories.
• Increased productivity: Today, a single worker produces many times more than was possible in the past – we say that their productivity has increased. A small number of people produce enough for everyone, freeing up the remaining workers for other tasks.
• Changing demand: When people earn more, they rarely spend the extra money on even more bread – they spend it on travel, sport, health, advice or entertainment. As prosperity increases, people therefore demand more services – and that is where new jobs are created.

Look at the trend in the chart below. It is a model: the figures are rounded, simplified shares – but they still show the overall trend correctly.

Does this pattern apply everywhere? A look at Liechtenstein shows: not quite.

In most wealthy countries, only about two out of ten workers are now in the 2nd sector. In Liechtenstein, however, it is around four out of ten – an unusually high share for such a small country. World-famous industrial companies have their headquarters here: machinery and fastening technology in Schaan (Hilti), automotive technology in Eschen (steering systems from thyssenkrupp Presta), food products in Schaan (Hilcona) and dental products (Ivoclar). Their products are exported all over the world.

At the same time, Liechtenstein has a strong service sector: the financial centre, with banks and fiduciary firms in Vaduz, employs many people, alongside trade, schools, healthcare and tourism. The 1st sector, by contrast, has become tiny: only about one in a hundred workers is employed in agriculture.

Liechtenstein illustrates two points. Firstly, this small economy creates so many jobs that more than half of its workers commute in daily from Schweiz and Österreich. Secondly, structural change is not a law of nature that follows the same pattern everywhere. Liechtenstein's agriculture has shrunk too – but its industry has remained strong, while becoming much smaller in many other countries. How a country develops depends on its businesses, its location and its decisions.