Title: Service Sector Productivity and International Competitiveness
Abstract: New research casts a surprising light on productivity differences among service industries across the Triad WEDDED TO OUTDATED ideas about the importance of manufacturing, economists of all stripes have usually given short shrift to the service sector. When they did pay it attention, it was often to conjure up derisive images of unskilled, low-wage armies of burger flippers and supermarket clerks. This was always wrong. It is now dangerous. The conventional wisdom about services is seriously in error. Manufacturing is, and of course will remain, genuinely important to the economic health of industrial nations. Today, however, in terms of employment, income, international trade, and even production costs, services have become yet more important. This is the inescapable conclusion of a recent study by the McKinsey Global Institute of service productivity in the United States, the United Kingdom, Japan, France, and the former West Germany.(*) The evidence is compelling: discussions of international competitiveness based solely or primarily on what goes on in factories fail to reflect the true flows of value-creating activity in the modern global economy. Just consider: * As Exhibit 1 indicates, the share of employment accounted for by services has grown steadily for more than a century in the countries studied. Exhibit 2 shows the distribution of these jobs across the major categories of services in one representative year, 1988. * With a majority of workers in these countries now employed in the service sector, service-related earnings have become a prime determinant of national income. Not only that, the familiar claim that work in the services is poorly paid needs qualification. In the United States, for example, a fair number of service industries pay relatively high levels of compensation. Some pay as much or more than the average manufacturing wage. True, service industry compensation as a whole is still below the national average, but rising productivity levels in services will likely boost the living standards of all wage earners. * In recent years, the service has become an increasingly important element in world trade. US service exports grew from 15 percent of all US exports in 1975 to 26 percent by 1990. This contributed to a positive $64 billion net foreign balance in the US services current account for 1990. * Improvements in service productivity also have a direct impact on the international competitiveness of manufacturing firms. These firms are customers of the service and must be concerned about the price and quality of what they buy. We estimate that the service represents about 23 percent of the value of sales of the industrial of the US economy. As a result, a productivity disadvantage of, say, 20 percent in services would mean a disadvantage of 4.6 percent (20 percent of 23 percent) of sales cost -- a gap that would sharply reduce or even eliminate the profits available to some manufacturing companies from international trade. For US policy makers, these findings take on special importance as a corrective to overblown concerns about national competitiveness. As Exhibit 6 shows, of the 70 percent of the nation's GDP represented by real market sector activity, 56 percent is in services. Thus productivity differences in this may determine, in large measure, the overall productivity differences between national economies. In this light, it is particularly notable that in four of the five service industries we studied in detail -- airlines, telecommunications, retail banking, and general merchandising -- the United States had the best productivity performance. Exhibit 7 summarizes these results; Exhibit 8, the most likely causes. Unconventional wisdom Our case-by-case analyses of these five service industries called in question a number of long-held assumptions about service productivity. …
Publication Year: 1992
Publication Date: 1992-09-22
Language: en
Type: article
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Cited By Count: 6
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