Across OECD countries, services now account for more than 70% of total employment and value added. There is an ongoing debate in the economics literature with regards to the source of productivity, and therefore sustained economic growth, in these services-based economies, which increasingly also characterise many rapidly-growing, ‘developing’ economies. The standard definition of productivity growth – where output increases for a given level of inputs, including ‘labour’ – is only able to explain the rise of services in the context of near-full employment, as experienced over the last decade in many developed economies, to a limited, and therefore unsatisfactory, extent. Two concepts are important to this debate.
First, productivity growth has, in the past, generally been associated with lower labour costs per unit of output, which has typically been ascribed to the substitution of physical capital (via complete automation or partial technological augmentation) for human labour inputs. This view implies that as output grows, employment of human capital will decrease proportionally – in other words, as economic activity in the services sector grows, it should be expected that employment in these industries shrinks, rather than grows, as a percentage of their size.
Second, it was proposed in the late 1960s59 that services, by their nature, are unable to produce ‘true’ productivity improvements due to their inherent reliance on human inputs, with the classic example being the statement that ‘after 300 years, it still takes four people to deliver a string quartet performance’. This view has been labelled the ‘productivity disease’ of services60, because growth in revenues and outputs in services tend to be associated with increases in human input, with the implication that innovation through technological substitution is less likely than in other sectors.
The recognition that services are a significant source of productivity growth overturns the historical perception that services suffer from a productivity ‘disease’61. More importantly, it is now acknowledged that, in services, ‘employment and productivity growth can go hand-in-hand’62. Across the OECD, differences in the level of services employment now account for almost all variation in aggregate employment rates amongst countries, and, on average over the last decade, the bulk of jobs growth in the OECD area has occurred in services industries, with most jobs created involving highly-skilled workers63.
The ability to both create jobs and achieve productivity growth through technological innovation is what sets services apart from manufacturing, agricultural and resource-based industries, where productivity gains typically arise from the increased substitution of technology for labour inputs, rather than the simultaneous increase in the use of both. Furthermore, the strong performance of services is not only important for their own sake; it also helps underpin growth in those sectors, including manufacturing, that use services as an input’64.
Services firms generally, therefore, rely predominantly on human, rather than physical, capital, as their primary source of sustainable competitive advantage; and knowledge-intensive services, in particular, require specialised skill sets and domain knowledge for their ongoing growth. As productive knowledge-intensive services firms grow, in other words, so too does the number of highly skilled jobs.