Arnold Kling  

Service Sector Productivity

Statistical Jargon... Debating Rubinomics...

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?

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COMMENTS (8 to date)
Julie Cholet writes:

Speaking as a community college adjunct professor and as a student, I believe the higher education field has a huge amount of untapped potential for usage of information technology. My best example is a university telecourse in which I am enrolled. One excellent and dedicated professor televises his single classroom section to around 1000 distance-learning students. Not only is the experience easy on my schedule, as I can watch any class session at leisure on my own or through the library, but the teaching assistant fills in the gaps during my scheduled class time and makes my experience nearly the same as that of an in-class student (perhaps better, as they emphasize the 'student perspective.) Furthermore, the course is televised to the public and provides all sorts of "excess value" (for lack of knowledge of the economic term) to anyone who cares to learn the subject on their own. I believe that ultimately this format could spread to a great many academic fields and help the very best teachers communicate with far more students, without the need for one teacher for every one classroomfull. This could greatly improve productivity in a field which I think struggles under its dependence on public funds and high operating costs.

Thanks for reading, and I hope to hear some other interesting perspectives.

Eric Krieg writes:

When the string quartet cuts a Dolby Digital 5.1 DVD-Audio track, which gets played gazillions of times around the world, why doesn't THAT get counted towards the quartet's productivity?

Lawrance George Lux writes:

I was thinking on posting a comment on the Varian article on my Blog on another site. The Productivity gains are the major factor for the loss of Jobs, since before the last Recession. The Jobs are not likely to return very soon, and then only in other economic areas of endeavor. This is a problem in the immediacy, but a long-term benefit.

There is much untapped potential for Productivity gains, but not from information technology. The next big step will be in industrial line supervision, where even Maintenance will be done by machine, guided off Computer screen. This technology will eventually expand to the Services industries. lgl

Mcwop writes:

Wow! I agreee with LGL.

There are untapped productivity gains, and cost reductions that can be made. It would be cheaper and faster for my doctor to email a pharmacy RX than writing it, and having me mail to Medco or driving to CVS. Not a great example, but a convinient one.


John Thacker writes:

Eric has an important point. While it still takes 4 people for a string quartet, it no longer takes 1 string quartet per performance. And the quality of recorded performances keeps increasing.

Eric Krieg writes:

>>And the quality of recorded performances keeps increasing.

Well, except for the whole MP3 phenomenon. They sound like crap!

To some audio snobs the CD was a step down, acoustically speaking.

DVD Audio is very nice. Way better than a CD.

David Foster` writes:

Organization design can impact productivity as much as technology. I think a major issue in health care is the extremely stratified class system--doctors as demigods and nurses in a very subordinate position, with no one in between. I can't think of any other industry in which such a situation exists; it's like "Blondie" in which Mr Dithers owns the company and Dagwood appears to be some kind of clerk.

Robert Schwartz writes:

Too obvious, why are there lecture courses? Why does my doctor keep hand written notes in a binder that keeps getting lost?

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