(FORTUNE Magazine) – IS THE EXPLOSIVE growth of service industries condemning increasing numbers of Americans to low-wage lives? To many economists, journalists, business and labor leaders, and politicians, the answer is yes. The manufacturing jobs that have historically provided the bulwark of the middle class are vanishing, they argue; the service jobs created in their stead mainly employ hamburger flippers, sales clerks, and janitors. ''A serious mismatch has developed between the jobs being lost and those being created in our society,'' claims the AFL-CIO in a pamphlet titled Deindustrialization and the Two-Tier Society. ''The once solid middle tier of American jobs has been undermined.'' Big labor's broadside bears the imprimatur of several politically potent groups, including the NAACP, the National Organization for Women, and such unlikely allies of Smokestack America as the Sierra Club. If the AFL-CIO is right, the U.S. is headed for long-run trouble: incomes will decline, the economy will generate less wealth, business will lose important markets, and living standards will fall. But a close look at what has been happening to employment and earnings patterns -- and what is likely to happen -- suggests that the fear of deindustrialization is considerably exaggerated. The shift to services is indeed changing the type of work done by many Americans. But while it may be kicking some people down from the middle class -- which is by no means clear from the sketchy data available -- it's not kicking many. It may even be lifting most Americans into more lucrative lines of work. One reason for optimism is an enormous -- and largely unremarked -- boom in capital spending in the service sector. That promises to raise the productivity of service jobs and, along with it, their pay. At the least, the evidence suggests that white-collar jobs paying average or aboveaverage wages are growing fast enough to keep the middle tier solid. As used here, ''services'' conforms to the industry definitions favored by the Bureau of Labor Statistics (BLS) in Washington. BLS divides the economy into a goods-producing sector -- farming, mining, construction, and manufacturing -- and a service-producing sector that includes literally everything else. (Other authoritative sources, including FORTUNE's Service 500 directory in this issue, list construction as a service activity.) Complaints about service jobs start with the observation that on average they pay far less than manufacturing jobs. In 1984 non-supervisory service workers earned $250 a week, while production workers in manufacturing brought home $373. But while the gap is real, the official data overstate it. Service sector earnings are dragged down by a disproportionate number of part- time workers (most of whom are part-timers by choice). More than 20% of service workers toil under 30 hours a week -- BLS's definition of part time -- vs. less than 5% of the manufacturing work force. If service jobs didn't provide plenty of Americans with the good life, U.S. living standards would have fallen long ago. Service-producing industries claimed more than half of all jobs over 30 years ago; today the figure is about 70% of the more than 107 million workers in the U.S. Those jobs are powerful producers of wealth: some 17 million service jobs outside government paid $326 a week or more last year, the median for full-time workers. That's roughly equal to the total number of manufacturing jobs. The growth of service jobs, in fact, is largely a sign of American affluence. Productivity gains in farming and manufacturing, which created more goods with less labor, have freed workers to provide services that a poorer society could not afford -- more education, more health care, more financial services, more travel, more professional sports, more eating out. Business's quest for greater efficiency and quality has encouraged contracting out of services once supplied in-house -- everything from menial tasks like cleaning and maintenance to top-notch legal and public relations advice or the latest in computer and communications services. How, then, to account for the impression that the shift to a service economy is undermining America's ability to generate wealth? In the 1970s the composition of employment underwent great and rapid change. Before then, the postwar growth in service jobs had chiefly come at the expense of agriculture -- where average wages are far below either services or manufacturing. But beginning about 15 years ago, job growth in manufacturing slowed markedly. During the recession years from 1979 to 1982, manufacturing went into a free fall. Services have been the engine, chassis, and body of the great American job machine, providing nearly 95% of the 25 million net new jobs created since 1969. More than half these jobs were in industries where the average annual wage was under $13,000 a year in 1980 -- medical services, eating and drinking places, retailing, business services, and the like. The ominous overtones of that trend seemed confirmed in 1982, when the Census Bureau reported that the number of families with middle-class incomes -- $15,000 to $35,000 a year in 1982 dollars -- had fallen 10% in 1979. Many people concluded that service industry growth was beginning to polarize America's work force by creating high-paying jobs for a relatively small number of professionals and executives and many more low-paying jobs for the great mass of workers (FORTUNE, November 28, 1983). But the incredible shrinking middle class turned out to be mostly mythic. The sharp drop in households with middle-class incomes was mainly a statistical fluke caused by a Census Bureau effort to improve its measurement of family | income distribution. Frank Levy, an economist at the University of Maryland, and Richard Michel, an economist with the Urban Institute, ran the government data through a computer and found that the distribution of family incomes had remained remarkably stable. Levy and Michel's work still leaves a lot of questions unanswered. Some of the stability in family incomes, for example, reflects the rise in two-income households. If more people have to work to earn the same amount of money, that's hardly progress. And a recent study by Robert Z. Lawrence, an economist at the Brookings Institution, suggests that if individuals, not families, are considered, the middle of the job market has indeed been compressed. Using median male weekly earnings of full-time workers as a benchmark, Lawrence found that the proportion of middle-class jobs -- by his definition they ranged from $13,000 to $25,950 a year in 1983 -- fell from 50% in 1969 to 46% in 1983. The bad news is that most of the shift reflected growth at the bottom. But it's hard to finger service work as the culprit. Although the proportion of service workers in the middle class dropped during those years by three percentage points to 42%, Lawrence found even more dramatic evidence of a decline in middle-class manufacturing jobs. They fell from 55% of all manufacturing jobs to 48%. The most compelling explanation for the sag in middle incomes lies in demographics. Since 1970 the number of 25-to-34-year-old workers in the U.S. has exploded from 17 million to more than 30 million. In tandem with a big influx of older working wives, this huge supply of baby-boomers had a generally damping effect on wages -- and particularly on the wages paid young workers. Lawrence found that workers under 35 accounted for almost all the expansion of lower-class incomes since 1969. Among those over 35, there was a modest but general movement up the income ladder. Lawrence's survey did confirm one complaint voiced by the antiservice set: the service category that has grown most rapidly over the past 15 years is inordinately freighted with low-paying jobs. BLS inelegantly calls this category ''other services''; it lumps together everything from health, education, and business and professional services to advertising, repair shops, and beauty parlors. Some 41% of these employees earned under $13,000 in 1983. Only 29% of manufacturing workers earned that little. Credit the relative paucity of poorly paid manufacturing jobs mainly to unions, which claim more than 25% of the work force and have not only driven up wage rates for their own members but also set standards for others in the same industries. In the service sector, unions cover less than 10% of the work force outside government and haven't had as much influence on other workers' wages. The good news is that the fastest growth within that category was in the better-paying jobs. Despite demography's depressing effect, and counter to the general downward drift in incomes from 1969 through 1983, Lawrence found a slight decrease in the number of low-paid ''other service'' workers and some gain in the middle and upper tiers. That trend is even more vivid in a breakdown of the economy according to what people do rather than where they work. Drawing on the Census Bureau's monthly survey of 60,000 households, the BLS keeps tabs on changes in occupation. For nearly three decades the fastest-growing occupation category has been ''professional, technical, and related work,'' which pays well above average. Most of these high-paying jobs -- they include accountants, lawyers, engineers, doctors, and scientists -- are in service industries, but manufacturing has been claiming an increasing proportion. At General Motors, for example, the manufacturing sector's biggest employer, only the professional and technical occupations have greatly increased their share of employment through the auto industry's ups and downs over the past decade. Indeed, Ronald Kutscher, the man in charge of employment projections at BLS, estimates that, overall, roughly half the one million new ''manufacturing jobs'' created between 1969 and 1979 were white-collar service jobs in manufacturing companies. Though not conclusive, the general picture painted by the occupational numbers suggests an economy where white-collar jobs that pay average or above-average wages are growing fast enough to offset the decline in decent blue-collar jobs and the rise in more menial service work. Recently Neal Rosenthal, chief of the division of occupational outlook at BLS, confirmed that broad-brush impression with a detailed examination of 416 occupations tallied by the Census Bureau. Rosenthal divided occupations into three tiers by income, based on 1982 earnings, and then compared the number of workers employed in those fields in 1982 with the number in 1973. During the 1970s the share of the work force employed in the lowest-paying tier of occupations dropped two percentage points. The top third rose nearly three points, and the middle shrank by less than one point. When Rosenthal took changing pay within occupations into account, he found significant growth in the percentages in the upper tier, some growth in the middle, and a big drop in the lowestpaying fields (see chart). STUDIES LIKE THOSE of Lawrence and Rosenthal have inspired second thoughts among some people who rushed to the judgment that a growing service sector meant a shrinking middle class. Barry Bluestone, an economist at Boston College, is perhaps the most prominent; he now describes himself as ''agnostic,'' saying, ''I still believe it's potentially a major problem, but the jury is still out.'' If Kutscher's crew at BLS is right -- and their projections have proved pretty accurate in the past -- the jury should have less cause for hand- wringing over the fate of the middle class when it returns in five or ten years. For one thing, the big chill is largely over for blue-collar workers: the government's latest forecast of the employment outlook sees a big slowdown in the decline of manufacturing's share of employment through 1995. And employment in the relatively low-wage ''other services'' category should grow less frantically. Those who worry that service jobs are bad jobs are right when they point out that, according to BLS projections, the greatest number of new jobs between now and 1995 will be for janitors, cashiers, waiters and waitresses, and others at the low-tech, low-pay end of the spectrum. But these are the categories that already account for huge chunks of the service sector, and the rate of growth for most will be no greater than the overall rate of employment growth. The fastest-growing occupations, by contrast, will be predominantly high-paying, high-tech service jobs, such as computer service technician, systems analyst, electrical engineer, and office machine repairer. According to Rosenthal, the result is likely to be that workers will continue to move gradually out of jobs with lower-than-average wages -- predominantly in blue-collar occupations -- and into white-collar fields with higher- thanaverage earnings. The computer boom will play a big role in this shift. Job growth in computer and data-processing services, where weekly wages average over $400, has far outstripped BLS's past projections and is being revised upward in the new forecast. With a base of only 362,000 employees -- one-tenth the eating and drinking industry's -- the computer and data-processing services business has added 193,000 new jobs since May 1981, making it a top contributor to total employment gains. Computers are also reshaping service jobs and enhancing their value. Despite the myth that they are all labor-intensive businesses, service industries have been far and away the biggest buyers of the new information technology. The service sector purchased more than 80% of the $25 billion of computers, office equipment, and communications equipment shipped in 1982, the latest year for which figures are available. Since the recovery began, equipment spending, particularly for computers, has surged at twice the normal rate for postwar recoveries. By separating the components of capital spending into ''high-tech investment'' (computers, communications, instruments, measuring and control devices) and ''basic industrial investment'' (heavy machinery and factory equipment), Morgan Stanley economist Stephen Roach has made a dramatic discovery: after rising sharply since the mid-1960s, the capital stock per worker in the service sector recently surpassed that of manufacturing. ''The sources of vitality in the economy are shifting,'' says Roach. ''The service work force is now as richly endowed with capital as the typical production worker on the factory assembly line.'' SIGNS OF the growing capital intensity of services abound. According to the Nilson Report, a newsletter for the electronic banking industry, installations of automated teller machines have jumped fivefold since 1979 to almost 50,000. William McGowan, chairman of MCI, the Washington-based telecommunications company, says that half his company's rapidly expanding work force now toil at their own computerized work stations. Peat Marwick Mitchell & Co., a Big Eight accounting firm, recently developed a tailor-made package of software and bought 4,000 Macintosh personal computers for its 7,000 professionals. In the past, big companies in finance, insurance, and transportation were the heaviest users of computers. But with the advent of the personal computer, Nobel Prizewinning economist Wassily Leontief and his associate, Faye Duchin, predict that small firms with large information requirements -- in industries like retailing, real estate, the hotel business, and educational services -- will show the biggest rate of growth in computer use. All this capital isn't likely to boost short-run wages for checkout clerks in grocery stores with optical scanners or janitors with high-tech vacuum cleaners. But a few service workers may see some immediate benefits. A computerized keypad developed by Validec, a Silicon Valley start-up, sends a waiter's orders directly to the bar or kitchen via radio waves (see previous page). Robert L. Chambers, Validec's vice chairman, claims that his test system in a demi-posh Palo Alto eatery increases table turnover, which means more tips. And in general, new technologies should contribute to productivity and efficiency, raising the nation's total wealth-producing ability and the resources for increasing the rewards of workers. The investment boom in services should also tend to lift average wages by eliminating poorly paid drone jobs and increasing the demand for skilled positions. That has clearly been the experience of the financial service and insurance industries. Says Donald Mann, vice president of human resources at Prudential: ''Fifteen years ago we had a pyramid-shaped staff, with large numbers of entry-level clerical jobs at the bottom. As technology was introduced, the shape has altered so that the pyramid looks like an onion or a football. We may be going toward a diamond.'' John Gosden, a vice president at Equitable, agrees with that sparkling outlook: ''It's the boring jobs that are gone -- opening mail, filing, wheeling trucks around, keypunching data into a mainframe.'' At Citicorp about one-third of all new hires fall into either the professional or managerial class, the highest-paid sectors of the economy. ''That's a far cry from five to ten years ago,'' says Citicorp Chairman John Reed. The riptides of change will buffet many individual occupations. BLS expects that the baby bust's diminishing ranks of college-bound teens will carry more than 100,000 college and university faculty positions out to sea. The word processor will slow the growth of secretarial slots. Still, for most of the displaced, equal or better opportunities are likely. The office of the future will keep a human face: the BLS expects some 180,000 new receptionists by 1995, a 50% increase. It also sees openings for 350,000 more accountants and 160,000-odd lawyers. The lawyers will delegate more work, however: the ranks of paralegals should double to about 90,000, making them the second-fastest- growing job category in the BLS's employment outlook. The ghost of Ned Ludd in a white collar still haunts Wassily Leontief, who predicts that out in the 21st century, automation will retard employment growth in services as it did in manufacturing. But nothing that's happening so far points in that direction. Rather than fire employees, most companies prefer to retrain their existing work force. U.S. corporations spend an estimated $30 billion to $50 billion a year on training. For the secretary upgraded to word-processor operator, rising skill usually brings better pay. MODERNIZING INDUSTRIES often create new employment opportunities. Stanford University economist Timothy Bresnahan estimates productivity in financial services has been growing at an annual average rate of 3% over the past two decades, thanks largely to huge investments in computers and telecommunications. During those years industry employment more than doubled to 6.8 million. Says Bresnahan: ''Costs and prices in this industry have been falling relative to the rest of the economy, which helps explain why its employment share is rising.'' Leontief's own study of the employment outlook for the next 20 years suggests that the rapid spread of new information technologies should create more jobs than it displaces. The ''upskilling'' of services coupled with a continued relative shrinkage in manufacturing employment does appear to pose problems for the poorly educated.''The declining middle really refers to the declining prospects of people who just go to high school,'' says Richard Freeman, a labor economist at Harvard University. ''The industries that offered those people good jobs are eroding.'' Some observers think that though teachers may have trouble finding college jobs, the 1990s should offer great employment prospects in retraining and vocational centers. But the problems posed by a declining living standard for the undereducated are altogether different and far less threatening than Karl Marx's vision of society dividing into ''two great hostile camps'' -- a specter of rich vs. poor raised by some who embraced the shrinking-middle-class hypothesis. And for others sometimes regarded as ''disadvantaged'' -- young people, old people, and women -- a service economy that places a premium on brainpower offers far more opportunity than an agricultural and industrial economy that demands sweat labor. The shift to services doesn't mean the U.S. is producing fewer goods. Indeed, the manufacturing share of output has remained surprisingly stable: U.S. goods production as a share of GNP has hovered around 46% for more than two decades. An economy turning out the same amount of goods with fewer workers is an economy with more disposable income available for buying high- value services -- which makes for a richer society. Rising service sector employment is largely a reflection of what's right with the U.S. economy rather than the reverse.

CHART: TEXT NOT AVAILABLE The Service Route to Higher Earnings The long climb of service employment (top chart) may well be lifting incomes. Ca culations by Neal Rosenthal of the Bureau of Labor Statistics (bottom chart) sho that workers moved out of the worst-paid jobs and into occupations ranked in th top and middle thirds of all jobs by income. Weekly earnings in 1982 averaged $ 62 in top jobs and $328 in middle jobs.

CHART: TEXT NOT AVAILABLE Where the Future Jobs Are -- and Aren't Building custodians, as the Bureau of Labor Statistics calls janitors, will clai the biggest number of new jobs, according to the SBLS, followed closely by cash ers, secretaries, and office clerks. But most of these occupations won't increas their share of total employment. The big percentage gainers are high-paying job in technical and computer-related fields.