Three-sector hypothesis Totally Explained

Everything about The Three-sector Hypothesis totally explained

The three-sector hypothesis is an economic theory which divides economies into three sectors of activity: extraction of raw materials (primary), manufacturing (secondary), and services (tertiary). It was developed by Colin Clark and Jean Fourastié.
According to the theory the main focus of an economy's activity shifts from the primary, through the secondary and finally to the tertiary sector. Fourastié saw the process as essentially positive, and in The Great Hope of the Twentieth Century he writes of the increase in quality of life, social security, blossoming of education and culture, higher level of qualifications, humanisation of work, and avoidance of unemployment.
Countries with a low per capita income are in an early state of development; the main part of their national income is achieved through production in the primary sector. Countries in a more advanced state of development, with a medium national income, generate their income mostly in the secondary sector. In highly developed countries with a high income, the tertiary sector dominates the total output of the economy.

Incorrect predictions of the hypothesis

Though various empirical studies appear to support the three-sector hypothesis, four inaccurate predictions can be identified in Fourastié's The Great Hope of the Twentieth Century:

According to Fourastié, the transition from the secondary to the tertiary sector should eliminate unemployment, since in his view the tertiary sector is unlimited in size. As his theory appeared in the 1930s, however, he didn't take into account the enormous technological developments that would transform the service sector, for example the invention of computers.
Fourastié believed that there would be no states in which the secondary sector remained strongly represented even after a highly developed third phase had been reached. A counter-example is the Federal Republic of Germany. Although the secondary sector in Germany has sharply diminished since the 1950s, it hasn't fallen to the level predicted by Fourastié. The reasons for this lie in Germany's extremely high export rate.
Fourastié believed that the tertiary sector would always require an extremely high level of education of the workforce. However this isn't the case. Since the tertiary sector is often equated with the service sector, it also includes jobs such as bootblacks, street sweepers and bellboys. The theory that an extremely high level of education must be reached to be able to work in the service sector is refuted by examples such as these.
Fourastié believed that workers' wages would be harmonised at a high level in tertiary economies, but this hasn't happened. In fact the change has been in the opposite direction: the wage gap is continually increasing in most OECD countries.

Fourastié described the tertiary sector - which as a rule is equated with the service sector - as a production sector with little or no technological development and therefore only modest gains at best in productivity. However the equivalence of the service sector and the tertiary sector is today only valid in a few cases. Therefore the creation of a new quaternary sector based on information, and the evolution from a post-industrial service society to an information society, or information revolution are among the ideas often promoted today.
The terminology of first, second and third sector is today often used to distinguish between the (production-oriented) domestic economy (first sector), the state (second sector), and non-profit organisations (third sector), rather than in the way described above.

Structural transformation according to Fourastié

The distribution of the workforce among the three sectors progresses through different stages as follows, according to Fourastié:

First phase: Traditional civilizations

Workforce quotas:

Primary sector: 70%

Secondary sector: 20%

Tertiary sector: 10% This phase represents a society which is scientifically not yet very developed, with a negligble use of machinery. The state of development corresponds to that of European countries in the early Middle Ages, or that of a modern-day developing country.

Second phase: Transitional period

Workforce quotas:

Primary sector: 20%

Secondary sector: 50%

Tertiary sector: 30% More machinery is deployed in the primary sector, which reduces the number of workers needed. As a result the demand for machinery production in the second sector increases. The transitional phase begins with an event which can be identified with industrialisation: far-reaching mechanisation (and therefore automisation) of manufacture, such as the use of conveyor belts.
The tertiary sector begins to develop, as do the financial sector and the power of the state.

Third phase: Tertiary civilization

Workforce quotas:

Primary sector: 10%

Secondary sector: 20%

Tertiary sector: 70% The primary and secondary sectors are increasingly dominated by automisation, and the demand for workforce numbers falls in these sectors. It is replaced by the growing demands of the tertiary sector. The situation now corresponds to modern-day industrial societies and the society of the future, the service or post-industrial society. Today the tertiary sector has grown to such an enormous size that it's sometimes further divided into an information-based quaternary sector (see above), and even a quinary sector based on non-profit services.

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