This morning's Wall Street Journal has a nice piece on productivity -- Is Productivity Growth Back In Grips of Baumol's Disease? The story is one of the more sophisticated discussion for the layperson of services and productivity than I normally see. The standard discussion lumps all services together and subjects them to Baumol and Bowen's standard example:
Their famous example was a classical string quartet -- there are always four players in a quartet and it always takes about the same amount of time to perform a set piece of music. You can't get any more music out of the same number of musicians over that same period of time. Broadening that to other types of services, the implication is that rich countries such as the U.S. that tend to veer toward services would face higher prices as wages and costs rise.
This is known as Baumol's Disease - labor intensive services have inherently lower productivity.
But, as the piece points out, and I have been saying for years, you need to know what you are measuring. For example, the nature of that string quartet's performance has changed:
The information-technology boom led to rapid efficiency gains not just in the production of high-tech equipment, as expected, but also in services such as retailing -- which had long been assumed to have little prospect for much improvement. The quartet can now be heard on iPods and even cellphones, meaning that even if musicians themselves aren't more productive, the methods of distribution are.
So, if the measure of productivity is notes produced per musician, then productivity in string quartets is stagnate. But if the measure is number of notes per musician reaching a listeners ears, then the productivity has increased a staggering among from the couple of dozen in the King's drawing room to the millions who can hear it live over telecommunications to the billion and billions who can hear it over the ages due to recording technology.
Thus, understanding what productivity is and getting the measures right becomes critical. So does understanding those services where productivity can be increased and where it can't. The Journal article makes the distinction between high productivity services and low productivity services, which is why I say it is more sophisticated than most discussions of the subject.
Unfortunately, it never really gives us a good discussion of why the high is high and the low is low. That is not the fault of the author, but is due to our lack of a good analytical framework. For example, we know that retail and wholesale trade have become highly productive. But, those are far different from the standard high-productivity story in the areas of finance and business services. Or are they? We know that retail and wholesale have become more productive due to inventory control and materials handling. Hasn't the same occurred in financial and business services where processes have been come more automated and IT allows for mass customization.
The real question will be health care and personal services, as the story points out. On the one hand, health care services can be the most labor intensive - therefore the most susceptible to Baumol's disease. On the other hand, applications of IT in record keeping, telemedicine etc. have the potential to greatly increase productivity. And improved health care has the side benefit of improving productivity in the rest of the economy as a whole.
One of the ways to look at how productivity might be increased is to get rid of the “services” categorization all together. Rather, look at the tangible and intangible features of the activity. In the tangible areas, productivity will be increased by better materials handling and increased automation. In the intangible areas, better IT and information handling.
In some areas, the answers may be counter productive. For example, haircuts. This is the classic atom-moving tangible service. But, it is unlikely that automation (the standard productivity enhancing activity in the tangible area) will help much. Better scheduling information, especially in the smaller shops, would.
In other areas both could work together. For example in transportation, the standard method of increasing productivity is to increase capital equipment. This could take the form of replacing taxis with buses (after all, buses carry many more people than cabs) and replacing buses with subways (since subways don’t get stuck in traffic like buses). But it is unrealistic to think you are going to get rid of taxis. Then the issue becomes, how to make the individual taxi more productive (rather than making the system more productive). That could include both more productive (i.e. more energy efficient) vehicles and better information flow (better scheduling).
In health care, it will be especially important to separate the tangible from the intangible. What helps in the x-ray room may be very different from what is needed in the nursing home.
These are but a few of the questions we need to address as we seek to understand productivity in the I-Cubed Economy. The new emerging area of “services sciences” is dedicated to this subject. However, they need understand that “services” are not all the same – and therefore increasing productivity depends on which “service’ you are looking at.