Plugging in to productivity


While Bill Clinton wrestles with the complexities of his economic plan, a surprising trend that could ultimately make life a lot easier for the new president may be developing. A handful of analysts believe that technology is beginning to help improve productivity in the service sector. If they are right, middle-class living standards, which have stagnated for the past 20 years, could start to improve.

The service sector gets little attention in most popular discussions of America's economic problems. Manufacturing, where U.S. workers go head-to-head with foreign competitors, is supposed to be the crucial area; services, which are mostly sheltered from international competition, are regarded as secondary at best. If anything, the growth of the service sector is seen as a symptom of our manufacturing decline, as steelworkers lose their high-paying jobs and become minimum-wage hamburger flippers. But serious analysts know that it is our performance in services, not manufacturing, that is the bigger economic problem. In fact, U.S. manufacturing performed reasonably well during the 1980s, with productivity growing at 2.9 percent per year. That was almost as fast as manufacturing productivity grew during the ''good years" in the 1950s and 1960s, and it was faster than productivity growth in most other advanced countries. So why didn't we feel better? Because near stagnation in service productivity -- growth at only about 1.0 percent annually -- held our living standards down.

Dominant service sector. The truth is that modern America is primarily a service economy. Currently, 70 percent of U.S. workers are in the service sector, versus only 20 percent in manufacturing. If we could eliminate our persistent trade deficits in manufacturing, those proportions would shift, but only slightly: A rough estimate is that completely eliminating our current trade deficit would raise the share of manufacturing in employment by only about 0.5 percent. In other words, like it or not, most Americans will work in the service sector for the foreseeable future. That means, in turn, that the productivity of the U.S. work force as a whole depends mostly on the productivity of service workers.

But is it really possible to raise service productivity? Some service jobs, like housecleaning and hair cutting, seem resistant to technological change -- at least until we learn to build robot maids and barbers. In the past, however, we have seen major improvements in service productivity. During the 1950s and 1960s, for example, a linked set of technological and social changes -- widespread availability of private cars and home refrigerators, the growth of supermarkets and an improved road system -- led to huge increases in retail productivity. An earlier era saw a surge in office productivity because of such revolutionary innovations as typewriters, carbon paper and vertical file cabinets. Indeed, the most significant American business success story of the late 20th century may well be Wal-Mart, which has applied extensive computerization and a home-grown version of Japan's ''just in time" inventory methods to revolutionize retailing.

Analysts like Stephen Roach of Morgan Stanley now believe that additional productivity gains in the office are possible. Computers, it seems, are finally being used to eliminate paperwork; back offices are shrinking, and corporate hierarchies are getting flatter. If you squint, you can see these micro changes starting to show up in the macro numbers. We are now officially a year and a half into an economic recovery, yet unemployment remains stubbornly high. One of the reasons for this lingering joblessness is that productivity is rising faster than expected, primarily in the service sector. If America eventually returns to full employment, the total economy could be bigger and more productive.

Technology investment is helping to fuel these changes. Preliminary data show that while overall investment in this recovery is weak by historical standards, computer related investment is soaring. It looks as if the service sector has decided that it now really knows how to make information technology work.

Like any radical change, the coming revolution in service productivity will have its victims. Skilled weavers were impoverished by the power loom, and small food stores were savaged by the rise of the supermarket. This time, it's the middle managers who will lose. The past recession took an unprecedented toll of skilled, white-collar workers, and many of these jobs may never come back. But most of America could benefit from rising service productivity in the 1990s, and that would be welcome news for Bill Clinton.

Originally published, 2.15.93