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OM in the News: How Services Drag Down Productivity Growth

November 2, 2016
Technology advances have boosted productivity in many sectors, but we still haven’t figured out how to build a better barber

Technology advances have boosted productivity in many sectors, but we still haven’t figured out how to build a better barber

As we point out in Chapter 1, growth in productivity—the goods and services a worker produces in an hour, a key determinant of wages and living standards—has petered out along with a slowdown in technological advances, which typically reduce the time spent to build a laptop or car. “It has been even more stubborn, though, on the services front,” writes The Wall Street Journal (Oct. 31, 2016). People want their hairdresser, therapists, accountants and lawyers, to take their time, often the definition of good service.

American households spent $8.3 trillion on services last year, more than double their expenditure on goods. Meanwhile, the share of Americans employed in the more-productive manufacturing sector has shriveled from 13% to 8% since 2000. At the same time, those working in the fast-growing health, education and food-and-beverage services has swollen from 17% to 23%.

This is where the big drag is: Average annual productivity growth in these three sectors—from hospitals to the corner bar—ranged from minus-0.6% a year to zero over the 10 years to 2014. “The changing distribution of workers might be able to explain up to one-half of the slowdown in labor productivity growth from 2.5% to 1.5% per year since the 1960s,” says a U. of Houston economist.

Reforms that remove barriers to entry and promote competition in services, especially in health and education, could have a massive impact on aggregate productivity growth. Almost 30% of U.S. jobs—from carpenters and accountants to florists, dance teachers and interior designers—now require an occupational license, up from 5% in the 1950s. Absent such reforms, the service sector, expected to generate almost 95% of new jobs in the next decade, might be a ball and chain on productivity growth for some time.

Classroom discussion questions:

  1. Why is productivity such an important issue?
  2. What can be done to increase service-sector productivity?
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