Productivity in the U.S. services sector: new sources of economic growth

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Services dominate in output, value added, and employment Learn More View the related infographic Subscribe to receive more economics content. Figure 1. Link to Figure 1 Copy. Figure 2. Link to Figure 2 Copy. Services: Growing in importance in the United States as well In the United States, in , value added in the services-producing industries accounted for Link to Figure 3 Copy. Figure 4. Link to Figure 4 Copy. Figure 5. Link to Figure 5 Copy. Figure 6. Link to Figure 6 Copy. Figure 7. Link to Figure 7 Copy. Figure 8. Link to Figure 8 Copy. Figure 9. Link to Figure 9 Copy. Looking forward: Services in an increasingly digital economy Increasingly, services are being delivered—that is, traded, both within borders and across borders—digitally.

Authors Dr. Acknowledgments Cover image by: Orlando Hoetzel. View in article Show more Show less. Deloitte Consulting View. Download Subscribe.

Understanding the Service Sector’s Productivity Slump

Related Interactive 3 days ago. Share article highlights See something interesting? Simply select text and choose how to share it: Email a customized link that shows your highlighted text. Both formulas have the same ingredients:. Recall that compound interest is interest that is earned on past interest. It causes the total amount of financial savings to grow dramatically over time.

Similarly, compound rates of economic growth, or the compound growth rate , means that the rate of growth is being multiplied by a base that includes past GDP growth, with dramatic effects over time. Productivity, the value of what is produced per worker, or per hour worked, can be measured as the level of GDP per worker or GDP per hour. The United States experienced a productivity slowdown between and Since then, U.

It is not clear whether the current growth in productivity will be sustained. Over decades and generations, seemingly small differences of a few percentage points in the annual rate of economic growth make an enormous difference in GDP per capita. An aggregate production function specifies how certain inputs in the economy, like human capital, physical capital, and technology, lead to the output measured as GDP per capita. Compound interest and compound growth rates behave in the same way as productivity rates. Seemingly small changes in percentage points can have big impacts on income over time.

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Learning Objectives By the end of this section, you will be able to:. How are compound growth rates and compound interest rates related? Both formulas have the same ingredients: an original starting amount, in one case GDP and in the other case an amount of financial saving; a percentage increase over time, in one case the growth rate of GDP and in the other case an interest rate; and an amount of time over which this effect happens. Another way to calculate the growth rate is to apply the following formula:.

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Self-Check Questions Are there other ways in which we can measure productivity besides the amount produced per hour of work? Assume there are two countries: South Korea and the United States. What will the incomes of the United States and South Korea be in 20 years? How do gains in labor productivity lead to gains in GDP per capita? Critical Thinking Questions Labor Productivity and Economic Growth outlined the logic of how increased productivity is associated with increased wages.

Detail a situation where this is not the case and explain why it is not.

The services economy’s importance to world economic growth | Deloitte Insights

Change in labor productivity is one of the most watched international statistics of growth. Visit the St. State what you think the reasons for differences in labor productivity could be.

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How are they similar? How are they different? An economy starts off with a GDP per capita of 12, euros. After five years, who will have the higher productivity level, and by how much? Say that the average worker in the U. If the productivity of U. Glossary aggregate production function the process whereby an economy as a whole turns economic inputs such as human capital, physical capital, and technology into output measured as GDP per capita compound growth rate the rate of growth when multiplied by a base that includes past GDP growth human capital the accumulated skills and education of workers innovation putting advances in knowledge to use in a new product or service invention advances in knowledge labor productivity the value of what is produced per worker, or per hour worked sometimes called worker productivity production function the process whereby a firm turns economic inputs like labor, machinery, and raw materials into outputs like goods and services used by consumers technological change a combination of invention—advances in knowledge—and innovation.

Since productivity is output per unit of input, we can measure productivity using GDP output per worker input. South Korea has grown by a multiple of 2. For example, a financial transactions tax that reduced wasteful trading in the financial sector, as would measures that reduced waste in the health care sector. But the waste in these areas is not new, so they can't explain the slowdown. Countries were at very different stages of technological development, so if the explanation involved something inherent with technology, we would expect the further back countries to still be seeing rapid growth.

Carola Binder " Byrne et al.

It is still possible, however, that some undiagnosed measurement issues may be causing us to overestimate the severity of this slowdown. If macroeconomic and financial stability can be maintained, I think this should improve the odds of stronger productivity growth by encouraging capital formation and investment in innovation. John H. Cochrane "In my view, the increasing sclerosis imposed by the regulatory state is a large part of the problem. It takes years to get permits to do anything, if you can get it done at all. More and more industries are becoming less and less competitive as regulatory barriers get stronger.

We see the results — fewer new businesses forming, and high corporate profits despite low investment. In addition, the misguided incentives of well intentioned social welfare programs keep people from moving to better jobs. Maybe not. But it is clearly part of the problem. Livio Di Matteo "Low productivity growth is one of those puzzles that just does not seem to go away. I think productivity growth has fallen because economies have become more service oriented and service industries in general are more labour intensive and the productivity gains of new technology have materialized more slowly than goods production.

As well, very often each country can be a special case and poor institutions can further slow adjustment as can aging populations. I think the pace of technological diffusion will pick up in the next decade and then the question will be why is productivity growing so fast. You can also visit his personal blog Northern Economist 2. Colin Lloyd "It was Robert Solow who in stated 'You can see the computer age everywhere but in the productivity statistics.

20.2 Labor Productivity and Economic Growth

Mismeasurement of outputs and inputs. Lags due to learning and adjustment. Redistribution and dissipation of profits. Mismanagement of information and technology. As recently as Return of the Solow Paradox? Published in the American Economic Review finds the paradox still unresolved. More worryingly the authors find that when productivity improvement can be identified 'it is driven by declining relative output accompanied by even more rapid declines in employment. This is among the greatest challenges facing society today and in the future.

Elliott Morss "My first response is that this concern about declining productivity is of secondary importance. The problem is normally formulated as follows: Output per man-hour is not increasing. That means without more people, output will not increase. The fact is that productivity grew rapidly during and after the depression because people lost their jobs.

That provided a spike in productivity. Now, companies realize they fired more than they should have and are hiring more back. These adjustments are minor when compared with the effects of automation that is wiping out jobs worldwide in both the production of goods and services. Mike "Mish" Shedlock. Many believe productivity is understated. They cite cell phones and other technological advances.

People are tied to their phones for work. How many hours do people spend on the phone while on vacation, on weekends, or on their days off answering corporate emails? Given performance pressures on big box retailers, pressures to work more than 40 hours while getting paid for 40 hours must be intense. George Selgin "There are of course all sorts of factors contributing to the productivity decline, including demographic ones that we can do little about—such as the low labor participation rate.

But there are others that policy can and should address. Thanks to the combination of low market interest rates, interest on excess reserves, and new Liquidity Coverage Ratio requirements, for instance, commercial bank loans and leases, which used to be almost equal to total commercial bank deposits, are now but 80 percent of such deposits, while bank reserves, which used to be a trivial share of deposits, are now about 20 percent of those deposits. All this translates into less productive investment of savings, and hence into lower productivity generally.

These policies, they say, are among the more important causes of world underdevelopment. David Andolfatto " Why would one ever expect productivity growth to grow smoothly, year after year, at some constant rate? Jeff Miller "From my investment manager perspective — I am interested in excellent research, but also attentive to unusual events.

In the following recession, and again in , companies laid off workers but tried to produce the same output. We have all seen businesses like that. Productivity increased as payrolls were cut and has slowed down as it has normalized. I am not sure we have a definite answer. There are two explanations that I find plausible and there is empirical evidence supporting both:. He has documented this hypothesis very clearly for the US economy. My recent empirical work on this suggests that this was the case as well during the current crisis.

This is a level effect, not a growth effect and should not last beyond the recession — unless we believe that there is more to it. Some of the recent work by Blanchard and others looks into the idea of interactions between confidence and productivity growth that could suggest the possibility of multiple equilibria you could call it superhysteresis.

My sense is that if we manage to stay away from recessions it will bounce back relative to what we have seen during the crisis but it will not go back to the early s period unless there is something fundamentally new in technology and innovation. Miles Kimball "Here is one factor other people may not have emphasized: as long as the major categories of goods and services each have a price elasticity less then one, if they get cheaper relative to other things, they also become a smaller and smaller share of the budget.