Does anyone really want a faster haircut or a speedier dentist?
Economists seeking to explain slowing productivity growth have pointed to a downturn in global innovation. Overlooked in that debate is how hard it is to innovate in services, which are lapping up a growing share of consumers’ budgets as goods prices fall. Technology has transformed many services—think of TurboTax, for instance—but has left many sectors like education relatively untouched.
Growth in productivity—the goods and services a worker produces in an hour, a key determinant of wages and living standards—has petered out along with a slowdown in technological advances, which typically reduce the time spent to build a laptop or car.
It has been even more stubborn, though, on the services front. People want their hairdressers and therapists—and even their accountants and lawyers—to take their time, often the definition of good service.
American economist William Baumol dug into this phenomenon decades ago, exploring how an expanding service sector can hobble productivity growth. He illustrated his thesis with the extreme example of the performing arts. “It’s fairly difficult to reduce the number of actors necessary for a performance of Henry IV,” Mr. Baumol, now a New York University professor, wrote in his landmark 1965 article.
American households spent $8.3 trillion on services last year, more than double their expenditure on goods, while in China the rapidly growing service sector surpassed 50% of GDP for the first time.
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%.
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