Service Sector Productivity
By Arnold Kling
Hal Varian’s New York Times column today discusses the apparent rebound in service-sector productivity since around 1995. Before this rebound occurred, there was a fear that service sector productivity growth was inherently slow.
Way back in 1967, the noted economist William Baumol diagnosed what has subsequently become known as Baumol’s disease. He argued that most services were, by their nature, labor-intensive. Indeed, the perceived quality in service industries often depends on how much labor is involved.
No one cares how many workers it takes to build the cars we drive, but the teacher-student ratio is viewed as a critical determinant of the quality of our schools. Or to use one of Mr. Baumol’s most striking examples: even after 300 years it still takes four musicians to play a string quartet.
Varian cites work by Jack Triplett and Barry Bosworth that credits information technology with improving productivity in the service sector.
When you look at the service industries that have performed well (telephony, wholesale trade, retail trade and finance) it is not hard to understand how information technology could be an important factor. It’s just a lot easier now for sellers to track inventory, monitor operations, communicate with customers, and react to shifts in consumer demand.
Triplett and Bosworth have a number of papers on this topic. Here is one example.
For Discussion. Looking at a specific industry, such as education or medical care, is there still a lot of untapped potential to improve productivity through use of information and communication technology?