New data available from the Commerce Dept. have shattered an old myth: that productivity growth is universally dismal in the service sector. Indeed, a fair number of the country's service industries are actually increasing productivity faster than many manufacturing businesses are. Others that still appear to be running behind may not be. Still, productivity in the sector overall has only recently begun to grow again--and the laggards have good reason to keep on improving.
The recession is forcing service companies to take another look at some of the choices they made during the past decade. The result: rigorous cost-cutting campaigns in retailing, banking, airlines, business services, and a whole host of other industries. Judging from the experience of manufacturing, which went through the same process during the 1980-82 recession, this sort of slimming down, however painful, leaves the survivors more efficient and better able to compete internationally.
But there's a danger. Not all of these cuts are coming out of padded payrolls, bloated bureaucracies, and boondoggles. When service companies added workers, they did so to provide what they knew consumers wanted: more choice in restaurants, faster service in stores, and better treatment in hospitals. There's no getting around the fact that service companies are going to have to cut back, just as manufacturers did. But service companies must remember one thing: To do so and still flourish, don't cut the service that keeps the customer coming through the door. Service--not an improvement in the still-inadequate measure we call productivity--is the goal.