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CPS1239 Valerie M.B. et al.
Figure 3: Impact of services sectors on manufacturing and business services and economic
development

3. Results, implications for measurement and the value of time-use
measures
If there is servicification, how does that improve productivity? The
empirical evidence linking servicification of the economy to productivity
growth and economic development is still quite limited. Traditional Solow-
model approaches estimate a distinct decline in labor productivity in OECD
countries using national accounts. A recent paper notes that “fully 28 of 29
other countries for which the OECD has compiled productivity growth data
saw a deceleration in labor productivity growth over the last few decades. The
unweighted average annual labor productivity growth rate across these
countries was 2.3% from 1995 to 2004 but only 1.1% from 2005 to 2015”
(Brynjolfsson, Rock, and Syverson 2017, p. 6). This is a robust result. Part of the
problem is that traditional Solow-based models characterize the aggregate
production function as a function of in-house factors of production. It implies
that the greater productivity emanates from inside the firm or production unit.
This means that total factor productivity also incorporates the productivity that
should be attributed to outsourced services, but its value is biased upwards
because Solow models erroneously attribute to it only improved efficiency.
Using this new characterization, the distinction between what is a
manufactured good and what is a service becomes more blurred. This
gradual transformation of manufacturing production characterized as a
situation from a single production function of a firm in the 1950s (stage 1) to
specialization of labor (stage 2) to splintering of production units (stage 3) is
illustrated in Figure 4. YM is the output of manufacturing, whereas Ys is the
output of services. In the past manufacturing was more capital intensive, and
a simple measure of labor productivity would always yield a greater number
in the manufacturing sector than in the service sector (YM/LM > YS/LS). Once
the output of manufacturing is characterized as the result of a value chain of
production units (stage 3), it becomes less clear that output per worker is
higher for manufacturing than for services, because the distinction is blurred.

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