What’s it: The tertiary sector includes service businesses. They perform tasks or other work to help others. Their services are essential for supporting other sectors of the economy, including the primary and secondary sectors.
Service companies may serve individual consumers, such as when you stay at a hotel or shop at a retail store. Others may focus on other businesses or organizations, such as corporate banking services.
This sector has many areas: trade, retail, transportation, and warehousing. The financial industry, such as banking, insurance, and pension funds, is also included in the tertiary sector. In addition, health care, recreation and tourism, and entertainment are other examples.
Why is the tertiary sector important?
Answering the above question requires us to look at several things. First, the relationship between the primary sector and other sectors. The tertiary sector is crucial because they provide services to businesses in the primary and secondary sectors.
For example, mining, car, or food manufacturers need insurance services from the tertiary sector to protect their businesses and employees. They may also rely on bank loans for working capital or investment. In addition, car manufacturers or food producers rely on trading services to sell their products to consumers.
Second, we can see why the tertiary sector is important from its contribution to GDP. The output of the tertiary sector, measured by the added value generated, contributed 64% of the GDP in the world in 2021, or much higher than the manufacturing sector.
Third, the service sector accounts for 51% of the jobs created in the economy in 2021. This percentage has increased dramatically compared to 35% in 1992.
The tertiary sector is where the majority of people in developed countries work. This sector accounted for 79% of total employment in the United States in 2021. The figure is slightly higher in the UK (81%).
Fourth, its contribution to international trade – and therefore foreign exchange reserves for the economy – is also significant. According to the International Monetary Fund, world services exports reached $7.03 trillion in 2022. This figure has increased seven times compared to 1992 ($1.03 trillion).
Tertiary sector examples
The tertiary sector includes a wide range of service businesses. They may facilitate secondary sector firms to sell their goods as wholesalers and retailers do. Others may be involved in providing transportation services, such as railroads and airlines. Other examples of companies in the tertiary sector are:
- Pension fund
- Health services
- Legal services
- Publishing activities
- Educational services
- Consulting services
- Advertising services
Economic transition toward the tertiary sector
A country’s economic structure generally develops from the primary to the secondary sector and then towards the tertiary sector. In its early stages, the economy is traditional and relies heavily on the primary sector.
Later, when the economy developed, and industrialization took place, the secondary sector began to take on a more significant role. New factories were established to process raw materials from the primary sector. Rapid growth in the secondary sector then spurred the service sector – such as trade, transportation, and financial services – to grow.
Finally, when it becomes a developed country, the economy relies more and more on the service sector. Developed countries like the United States are now relying more on services and starting to outsource their production to countries with low wages or close to raw materials. They can exploit the tertiary and quaternary sectors as significant contributors to their output and employment.
Businesses like Apple and Samsung are establishing themselves to operate in the service sector. They then outsourced their production activities to other manufacturers, such as Foxconn.
Apple and Samsung realized more added value in the tertiary sector. Instead of engaging in manufacturing production, they can make more money by focusing on serving customers through innovation and selling their services.
Finally, the next transition is towards the quaternary sector. The classification separates the quaternary sector from the service sector. Although both offer services, the specific quaternary sector focuses on information technology and research and development (R&D) services.
Tertiary sector in developed countries vs. in developing countries
The transition to the tertiary sector marks how a developing country from a less developed country becomes a developed one. At least developed countries depend on the primary sector.
Meanwhile, developing countries usually begin to industrialize. Thus, the secondary sector began to take a more significant role in output and employment. In addition, industrialization encourages urbanization, where residents move to growth centers where production facilities are located.
Then, when a country transitions from developing to developed, the service sector grows significantly. Service businesses began to dominate output and employment. And as progress begins towards a mature stage – as in the United States, the quaternary sector is expanding.
The transformation from a less developed country to a developed one is ideal. However, in reality, some countries may grow differently than expected. Some countries are still developing even though the service sector has increased.
Then, even though the service sector has the highest added value, the primary and secondary sectors are by no means less important. In contrast, the four sectors above are interrelated but in a broad area, namely, global. This then drives what we refer to as globalization.
Globalization makes the economic sectors between countries interrelated. Their relationship forms an interconnected global production chain. It is supported by multinational and transnational companies.
Labor in the tertiary sector
Unlike the primary and secondary sectors, the workforce in the tertiary sector is highly skilled. Workers may acquire them through formal or non-formal education, such as training and certification.
Workers in the primary and secondary sectors may rely more heavily on technical skills. In contrast, jobs in the tertiary sector rely more on “brains” and knowledge.
However, we cannot generalize this conclusion to all service businesses because some jobs in the service sector require less specific skills, such as a waitress in a restaurant. In contrast, “brain” skills are essential for the workforce in the quaternary sector.
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