Boost in Services Productivity Needed
Poor performance in improving productivity in services is hurting the United States’ global competitiveness. Although the country’s competitive position depends heavily on the efficiency of its manufacturing base, services are increasingly affecting that efficiency.
U.S. manufacturing firms have increased their productivity an average of 3.4% per year since 1979. Over the same period, services productivity has increased only 0.4% annually.
In 1982, manufacturing firms’ purchases from outside sources of a wide variety of transportation, communication, utility, distributive, financial and business services accounted for 24% of their total costs. If we add the cost of company-paid hospital/medical insurance, the figure rises to 26%, almost equaling that of direct labor at 30%.
Without substantial improvement in services efficiency, the United States will not achieve strong national productivity growth and consequently a strongly rising national standard of living.
With services industries accounting for about 70% of total private employment, it would require an 8.3% annual gain in manufacturing output per hour to bring national productivity back up to its 2.3% long-term growth rate if gains in services continue at their present paltry pace. In addition, with services now accounting for virtually all employment growth in the United States, the country must look to that sector to provide the lion’s share of challenging and well-paying new jobs. Progress toward this objective is inextricably linked to improved productivity.
Faced with a loss of markets in a world of growing overcapacity and intensified international competition, manufacturing firms had little choice but to improve productivity. Most service industries are not confronted with direct international competition, which goes a long way toward explaining why their productivity performance has lagged so badly behind manufacturing during the 1980s. But manufacturers seeking additional ways to cut costs are putting increasing pressure on the services sector to improve its productivity performance.
A look at services productivity in other leading industrial countries gives us an idea of just how fast we can expect services productivity to grow.
Overall U.S. services productivity--excluding community, social and personal services--has grown at an average annual rate of less than 0.5% over the 1973-86 period, while Japan, France, and West Germany have experienced average growth rates of 2.9%, 2.2%, and 2.3% per year, respectively, and the weaker Swedish and British economies have had annual gains of 1% and 1.7%.
Further, the United States’ relative performance since 1979 looks worse than it did in the early part of the 1970s, showing no measurable improvement. Although West Germany’s performance fell off significantly, Japan and France remained strong. Meanwhile, Britain and Sweden showed marked acceleration, leaving the U.S. growth rate a full percentage point behind its nearest competition.
Services productivity varies substantially by sector. Wholesale and retail trade constitutes the largest services-producing sector--and probably the most important. Trade sector services, primarily the wholesale purchasing of materials, accounted for 10% of total manufacturing costs in 1982. Because wholesale and retail trade compose 40% of private service-producing jobs and 29% of all jobs in the private economy, it has a major impact on U.S. productivity performance.
Compared to the other five industrialized countries, the United States has fared badly since 1973 but has improved in recent years. U.S. output in services per employed person rose only 0.6% per year in the 1973-86 period, a pace that equals or betters those of Sweden and Britain, but falls well short of gains made by the more competitive economies--Japan, France and West Germany.
Since 1979, however, the rate of U.S. wholesale and retail trade productivity advance has quickened, to 1.2% per year. In most of the other economies, efficiency gains in services have slowed, leaving only the Japanese performance clearly superior. However, it appears that the better U.S. productivity performance in wholesale and retail trade since 1982 and for that matter since 1979 was largely due to a marked upsurge in economic growth.
When the data for all countries is adjusted to take into account U.S. output growth, U.S. productivity growth in wholesale and retail from 1979-86 lagged behind that of the other five economies by from 0.7 to 1.5 percentage points.
However, my analysis suggests that the pickup in U.S. performance from 1973-79 to 1979-86 was due mainly to fundamental efficiency improvements rather than stronger output growth.
Nevertheless, despite a pickup in the wholesale and retail trade sector, the overall rate of U.S. services productivity growth has not advanced significantly in the last few years, even though cost control has become an increasingly significant national objective.
The good news, however, is that the performance of other economies suggests that U.S. services productivity growth can be substantially increased--from the current 0.4% rate toward the 2% rate where other countries are clustered. This would provide a great boost for the entire U.S. economy.
