Things you can’t drop on your feet: an overview of Australia’s services sector productivity

• The service sector constitutes the bulk of Australia’s economy, contributing 79 per cent of value added and 88 per cent of employment.
  • This sector is diverse, encompassing all industries outside of mining, agriculture and manufacturing (the goods sector). This diversity (for example, from cleaning services to medicine) means that different service industries operate in very different ways.
• The rise of the service sector over the past 70 years, and the associated displacement of manufacturing as a share of economic activity, has raised fears of worsening labour market conditions, slower wage growth and slower productivity growth. Such fears are misplaced as:
  • a large service sector is a feature of a mature and prosperous economy. As incomes increase we spend proportionately more on services relative to goods which stimulates output in the service sector, increasing its share of economic activity
  • almost all advanced economies have had rapid growth in their service sector (and relative shrinking of their manufacturing sector). This is the case even for the ‘workshop of the world’, China, since 2005
  • productivity growth in many service industries (including finance, ICT and transport) has outpaced the goods sector by a significant margin over the past few decades
  • many service industries also have higher wages and total take-home pay than manufacturing, and the rise in casualised employment has been (proportionately) on par with the goods sector.
• However, some parts of the service sector (particularly labour-intensive and face-to-face services) have experienced persistently low growth in productivity and capital investment.
  • Mostly this is due to their ‘intrinsic’ characteristics — they often need to be delivered in person (relative to goods); and in some instances, their quality is hard for consumers to reliably observe prior to consumption (and equally hard for statistical agencies to capture in data).
  • In the ‘non-market’ sector, limited competition and a lack of market determined prices weaken incentives to innovate or contain cost growth.
  • Numerous measurement issues that affect the service sector may explain some of the poor performance as there are possible quality changes (potentially positive or negative) not currently captured by productivity statistics.
• The issues affecting the service sector are as diverse as the sector itself. This paper is the first of several studies. Subsequent releases will examine particular service industries, highlighting the unique characteristics influencing their productivity in ways that are not possible using national accounts data alone.

Service sector key to future wages growth

Australia’s economy, like that of almost all other rich countries, is increasingly dominated by its service sector.

If Australians are to experience ongoing wage and productivity growth, it will have to come largely from service industries, which account for 90 per cent of Australian employment and 80 per cent of output.

Slowing productivity and wage growth is a source of concern across the developed world, which has only been amplified by the economic challenges imposed by the COVID-19 pandemic.

The Productivity Commission’s report Things you can’t drop on your feet: an overview of Australia’s services sector productivity sheds light on the evolution of the services sector in Australia, busts some common misconceptions about services, and highlights the challenges associated with services productivity measurement and growth.

Services are very diverse. From cleaning to medicine, the skills service workers require vary tremendously, as have the sub-sectors’ productivity changes.

Some perceive service sector work as being poorly paid, yet services employees are paid more on average per hour than manufacturing workers. And services sector jobs overall are no more likely to be casual than other jobs in the economy.

Characteristics of some services can limit scope for their productivity growth. Many services are delivered face-to-face, improved business practices can be harder to implement and the quality of a service can be difficult to establish before purchase.

Digitisation is increasingly being used to overcome barriers to improvements in service sector productivity.

Technology is enabling services to be provided remotely, accelerated by forced changes during the COVID-19 pandemic. For example, increasingly, doctors are providing telehealth consulting, restaurants are joining online delivery platforms and office workers are using flexible work arrangements.

These are the sorts of technological innovations that increase household and firm choice, driving productivity and quality-of-life improvements.

The paper launches a new Productivity Commission series looking at individual service industries, their unique features and factors affecting their productivity performance with bespoke analysis.

The full report Things you can’t drop on your feet: an overview of Australia’s services sector productivity can be found at www.pc.gov.au

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Media team – 02 6240 3330 / media@pc.gov.au