No Service Sector Pain, No Productivity Gain

It may not be entirely a white-collar recession, but there's little doubt that white-collar workers are experiencing unusual pain these days. In the final quarter of 1990, employment in private service-producing industries, which are dominated by white-collar job categories, fell by 223,000 (excluding hiring in health services). That's a departure from the pattern in prior recessions, in which service-sector employment slowed later and less sharply.

The immediate effect of service-job woes, of course, is more turmoil in the workplace than most people anticipated. But economist Stephen S. Roach of Morgan Stanley & Co. is hopeful that the current travails will have a positive outcome in the years ahead. "The pressures of recession," he says, "may finally be forcing service industries to come to grips with their productivity problems."

It's no exaggeration to say that the U. S. productivity crisis is centered in the service sector. Since 1980, factory productivity has actually climbed 44%, as U. S. manufacturers have responded to foreign competition by slashing costs and restructuring their operations. But nonmanufacturing productivity has risen just 1.4%, despite heavy investments in computers and information technology by service industries.

Recent differences in productivity performance are particularly striking. Manufacturing-productivity gains accelerated to nearly 4% in the year ended in September, although they normally slow as the economy approaches a downturn. By contrast, nonmanufacturing productivity plummeted by 2.5%.

The reason for the factory sector's latest productivity surge, says Roach, is that "Smokestack America now looks ahead and tries to cut costs before a recession strikes." Thus, factory payrolls, which tended to expand significantly in the months preceding earlier recessions, were cut by about 2% in the year before the current downturn began.

Meanwhile, the beleaguered service sector's productivity woes finally came home to roost. With sales softening and competition heating up, white-collar job growth slowed sharply last year, as hard-pressed service industries began to thin the ranks of high-paid professional and managerial personnel. "Though that wasn't enough to generate meaningful efficiency improvments," says Roach, "it indicates that service industries are finally starting to get the message."

Lying ahead, Roach believes, could be a massive restructuring of the service sector, as companies concentrate on using information technology to cut labor costs and improve productivity among the far larger ranks of technical, sales, clerical, and other support personnel. "Such a change," he says, "would hurt temporarily but would sow the seeds for sustained prosperity in the 1990s."

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