Lagging Productivity Growth in the Service Sector: Mismeasurement, Mismanagement or Misinformation?

While the service sector has been growing rapidly as a share of total output, aggregate productivity growth has generally lagged behind that of the goods sector. In this report, the author assesses a range of explanations for lagging service sector productivity growth. Measurement problems appear to be greater in services than in goods, and a detailed analysis of output measurement in the three service industries experiencing the lowest productivity growth suggests that underestimation is likely significant in finance, insurance and real estate, in community, business and personal services, and in trade. A lower level of competition in services compared with goods may also have affected productivity growth, though this impact is very hard to quantify. Explanations based on the service sector's relatively greater investment in new technology, however, are found to account at best for lagging productivity growth only in the last decade. Finally, the hypothesis that service industries are incapable of high productivity growth because of their labour-intensive nature is shown to be inapplicable to much of the service sector. The report concludes by considering which service industries are showing the greatest growth. It is found that much of the increased service-sector output has been in areas that have shown relatively strong productivity growth, or where problems of measurement are particularly severe. Moreover, there is considerable potential for greater productivity growth in areas that may have shown slower productivity increases in the past, because of such factors as technological change and ongoing adjustments to past deregulation.