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MTI For Your Information: Productivity in the Services Sector
Nov 12, 2003

For Your Information Did you know that . . .

. . . two “doctors” have announced that “Baumol’s Disease” has been cured?

Economist William Baumol in the late 1960s argued that productivity in many sectors of the services economy tended to grow more slowly than productivity in manufacturing because services required hands-on activities (sales clerks, musicians) that machines could not replace. While once this may have been true, it now seems that the high technology revolution has managed to increase productivity growth even in the labor-intensive services industries.

An article in The Wall Street Journal (November 7) provides some examples:

• The Opera Company of Brooklyn is now performing with only 12 musicians and one technician using a computer to play the parts of former musicians, reducing the company’s wage bill by one third and enabling the company to increase the number of performances.

• Countrywide Financial Corporation, a large California mortgage lender, has reduced the time required to originate a loan from 60 days to about 10, and is now shooting to reduce it still further to 20 minutes, with labor cost savings following the time savings.

Two Brookings Institution economists, Dr. Barry P. Bosworth and Dr. Jack E. Triplett, recently released the results of research (supported in part with a grant from the Mark Twain Institute) that found that, in contrast to the experience of 1977-95, improvements in labor productivity in services industries after 1995 have been broad and comparable to that experienced by the economy as a whole. Services productivity averaged 1.0 percent a year from 1977-85. The economists’ new research found that it had increased to 2.2-3.9 percent per year from 1995-2000. Information technology investment played a major role in this growth in productivity.

Thus, the drive for cost-savings in services is as important as it is for manufacturing. We should not be surprised if pressures on employment from technology improvements as well as outsourcing continue to grow in this important sector of the U.S. economy.

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