American households spent $8.3 trillion on services last year, more than double their expenditure on goods. Meanwhile, the share of Americans employed in the more-productive manufacturing sector has shriveled from 13% to 8% since 2000. At the same time, those working in the fast-growing health, education and food-and-beverage services has swollen from 17% to 23%.
This is where the big drag is: Average annual productivity growth in these three sectors—from hospitals to the corner bar—ranged from minus-0.6% a year to zero over the 10 years to 2014. “The changing distribution of workers might be able to explain up to one-half of the slowdown in labor productivity growth from 2.5% to 1.5% per year since the 1960s,” says a U. of Houston economist.
Reforms that remove barriers to entry and promote competition in services, especially in health and education, could have a massive impact on aggregate productivity growth. Almost 30% of U.S. jobs—from carpenters and accountants to florists, dance teachers and interior designers—now require an occupational license, up from 5% in the 1950s. Absent such reforms, the service sector, expected to generate almost 95% of new jobs in the next decade, might be a ball and chain on productivity growth for some time.
Classroom discussion questions:
- Why is productivity such an important issue?
- What can be done to increase service-sector productivity?
