This sector has shaped the way Melbourne has developed in the past, and its ability to create further jobs will exert a major influence on what the city will become in the future. Rather than produce tangible, physical goods, service industries provide assistance to customers and the public, and maintain the quality and cleanliness of the physical environment. Over time the nature of service work has changed: in the 19th century, service work was done by omnibus drivers, nightsoil collectors and typists; in the early 21st century, it is done by child-care workers, contract gardeners, systems analysts, and the people who serve café lattes and Big Macs. What has not changed is the consistently high percentage of Melbourne's total output and jobs - generally around a half - produced by service work.
Economists tend to regard the growth of service industries as an important characteristic of the transformation that takes place in economies as they grow and mature. In less developed economies most work is done in primary production, with a high degree of self-sufficiency. Economic growth takes place when resources are transferred from agriculture to the manufacturing sector. Cities and their factories grow, and the primary sector that supplies them with food and raw materials becomes more commercialised and productive. As incomes rise, people increase their spending on services, which are generally labour-intensive and non-tradeable (in other words, they have to be provided on the spot). It is in economies that have matured and diversified that services account for the majority of jobs.
For a variety of reasons, Melbourne did not follow this path of economic development. From virtually the beginning of white settlement, primary production was market-oriented and efficient. Few, if any, people on the land were self-sufficient peasants. Although rural production itself made substantial use of cheap land and labour-saving investment, there was a need for commercial and transport services, which are performed most efficiently in an urban setting, to get produce to overseas markets. By the mid-19th century the urban population had grown quickly, even though the scale of manufacturing activity was modest, with local production being confined largely to goods that were too bulky or low in value to import. One of the paradoxes of the 19th-century Australian economy was that while its export wealth was derived from the capital-intensive exploitation of natural resources, a very high proportion of the population lived in towns, where most jobs involved non-tradeable, labour-intensive service work. Melbourne's experience was typical of the Australian colonies.
Contemporary observers generally thought that Melbourne and the other Australian capital cities were too large and that they drained resources from the productive sectors of the economy. Some modern historians have, in a similar vein, portrayed them as centres of poverty. Conditions in the service industries offer no support for these arguments: in capital cities wages for unskilled work were much higher than in the countryside, which indicates that labour shortages were more severe in the former. In Melbourne, economic growth widened job opportunities for women (which helps to explain the predominance of females in Melbourne's sex ratio), and high wages prevented many well-to-do families from being able to hire domestic servants. Melbourne's own need for housing and services generated an enormous demand for unskilled labour, and this was reinforced as each wave of immigration brought more spending. The service industries generally provided an easy entry to the workforce, and there was a marked absence of unemployed, exploitable workers, except in times of economic depression.
In the 20th century, Melbourne's economy became more diversified. Population growth (fuelled partly by natural increase, but also by overseas immigration and the movement of population from the countryside) and government tariff and infrastructure policies encouraged the development of manufacturing. New manufactured products made some service jobs obsolete (for instance, refrigerators meant that there was no longer any need for ice to be delivered to homes) but the creation of new service jobs helped to offset those that had been lost. These developments were in line with overseas trends, and in the 20th century Australia had a service sector that was comparable in size and composition to that of other developed countries.
The earlier precocious development of service industries had a lasting influence on Melbourne, however. High wages created an effective demand for housing, to which the building industry and the providers of infrastructure responded readily. The modest growth of manufacturing encouraged people to invest in other areas, notably suburban real estate, or deposit savings with banks or building societies, which channelled funds into house-building. Public transport services made it possible for Melbourne to develop its characteristic low-density pattern of city growth. The absence of a large, low-income proletariat and the ease of access to suburbs meant that few old inner neighbourhoods became slums by overseas standards. The retention of Melbourne's public transport system and the resistance to large-scale freeway-building meant that the inner suburbs have provided a perfect setting for gentrification and its associated booms in consumer-led service employment and construction. This has made, and continues to make, Melbourne one of the world's most pleasant, safe and lively cities.