Productivity Measurement Issues in Services Industries: “Baumol’s Disease” Has been Cured

September 1, 2003

It is now well known that after 1995, labor productivity
(LP, or output per hour) in the United States doubled its
anemic 1.3 percent average annual growth between 1973
and 1995 (see chart). Labor productivity in the services
industries also accelerated after 1995.

As we documented in a longer version of this paper (Triplett
and Bosworth forthcoming), labor productivity growth in the
services industries after 1995 was a broad acceleration, not just
confined to one or two industries, as has sometimes been
supposed. Using the 1977-95 period as the base, we showed
that fifteen of twenty-two U.S. two-digit services industries
experienced productivity acceleration. Both the rate of LP
improvement in services after 1995 and its acceleration equaled
the economywide average. That is why we said “Baumol’s
Disease has been cured.”

We also examined the sources of labor productivity growth.
The major source of the LP acceleration in services industries
was a great expansion in services industry multifactor
productivity (MFP) after 1995. It went from essentially zero in
the earlier period to 1.4 percent per year, on a weighted basis.
As MFP is always a small number, that is a huge expansion.
Information technology (IT) investment played a substantial
role in LP growth, but its role in the acceleration was smaller,
mainly because the effect of IT in these services industries is
already apparent in the LP numbers before 1995. Purchased
intermediate inputs also made a substantial contribution to
labor productivity growth, especially in the services industries
that showed the greatest acceleration. This finding reflects the
role of “contracting out” in improving efficiency.