Friday 31 January 2020

Market Structures in Services

Services have long been thought to suffer from a productivity problem. In fact, there is a long-standing concern that services add little to the economy. Particularly compared to manufacturing, which is typically more receptive to technological improvements, services productivity looks bleak.

What’s more, for various technical reasons a natural tendency exists in many OECD economies for services to expand as these countries become richer.

This creates a double whammy: if productivity in services are low to start with, plus a natural expansion of services exists in many rich economies, then ultimately the sector becomes a real drag on overall economic growth the richer we get. That’s the long-held view.

However, this view becomes increasingly debunked. A new report that ECIPE has developed, which was commissioned by the Bertelsmann Foundation, now shows that not all services are unproductive. In fact, some services show healthy productivity growth patterns.

Therefore, good evidence is starting to come up proving the point that services do not need to weigh down on the economy. On the contrary, there is enough potential for services to perform better. The truth is that there is a lot of productivity in many services sectors that remains unrealized.

What can explain this? For one, our study shows that the low pick-up of digital technologies by services firms is an important factor to blame. For instance, using Eurostat data, the report shows that the share of business services firms in the UK and Poland that pick up digital technologies (as measured by our self-developed E-business indicator) is only half the rate of Denmark and Finland, as shown in the figure below.