Productivity in Services: Limits to Growth?

Is there a limit to how much productivity can be increased in services?

            We lean advocates might be inclined to say no. Continuous improvement means you are always getting better, and I’ve never heard any lean believer suggest that gains in productivity are less achievable in one business sector as opposed to another.

            But I had to stop and say “Hmmm…” after reading The Outlook column this week in The Wall Street Journal. Writer Brian Blackstone questions whether the economy faces an incurable ailment known as Baumol’s Disease.

            This “disease” is named after economist William Baumol, who argues that the labor-intensive nature of some services acts as a constraint on productivity growth in an economy that increasingly produces services – such as the United States.

            Baumol’s prime example is a classical string quartet – it always requires four people, and it always takes roughly the same amount of time to perform a given piece of music.

            Blackstone makes clear that there is by no means universal support for Baumol’s position. Indeed, one pair of economists used available data on the economy to declare four years ago that Baumol’s disease had been “cured.”

            However, the reason the issue is being raised now is that the numbers on U.S. productivity growth were revised downward last week, indicating that productivity growth has slowed for four straight years. At the same time, Blackstone notes,

 

            …employment in traditionally less-productive sectors such as health care and leisure is growing rapidly, while employment in higher-productivity business services is growing more slowly; in manufacturing and retail trade, it is flat or shrinking. Therein may lie clues into whether the recent dip in productivity growth is a major turn or a temporary lull.

 

            Baumol, who is now at New York University, is quoted in the column as saying that not only has his namesake disease not been cured, but

 

            'I can brag and apologize that we've made the longest-lasting [correct] prediction that's ever been made in economics.'

 

            What do you think? Are productivity gains in services destined to always be lower than those in manufacturing? Post your comments below.