Authors' Words

Productivity in the Service Industries: Empirical analyses using microdata

Author's Introduction

What Does It Take to Enhance the Productivity of Service Industries?

This book provides empirical analyses of the productivity performance of Japanese service industries and their determinants based on microdata on firms, establishments, and workers.

In advanced countries including Japan, service industries account for a dominant share of the economy, and improving their productivity is the key to increasing the growth potential for the entire economy. Various public policy measures have been explored and implemented to help enhance productivity in service industries. However, in order to develop effective policy measures, the accumulation of objective evidence acquired through empirical analysis is a prerequisite.

Notably, firm heterogeneity has been emphasized in recent economic theories and empirical studies, which means that analyzing firm- or establishment-level data—instead of simply observing industry-level aggregate data and averages—is quite essential. However, unlike manufacturing industries for which basic statistical data are readily available, service industries have not been subjected to sufficient empirical analysis in Japan as well as in other major economies, and their productivity performance has yet to be understood fully.

Against this backdrop, I have conducted empirical research on Japanese service industries over the past several years, using microdata at firm and establishment levels, and published findings in academic research papers. This book, which is based on those papers with some additions and rearrangements, is intended to contribute to the further development of studies on service industries and help invigorate relevant policy debates. The book is unique in its focus on: 1) the "simultaneity of production and consumption," a characteristic that is peculiar to service industries and not observed in the manufacturing industries, and 2) "managerial capabilities" as a factor defining productivity.

Empirical analysis for this book has found that the productivity distribution of service firms and the determinants of firm level productivity are often different from those for their manufacturing counterparts. Key findings include the followings:

  • Whether the productivity of services industries is low relative to that of manufacturing industries depends on the data and/or measurement method used for comparison;
  • There exists significant productivity dispersion across firms even within the same service industry;
  • The productivity of service establishments is influenced significantly by the spatial concentration of economic activities and temporal changes in demand;
  • A mechanism in which the overall productivity of an industry is enhanced through entries and exits of firms and reallocation of market shares among continuing firms may not be functioning properly;
  • Managerial capabilities, a determinant behind strategic decisions such as investments in information technology, are essential to productivity improvement; and
  • The mechanism of corporate governance and the relationship between labor and management have a significant relationship with productivity.

These findings suggest that fundamental economic institutions and policies—such as urban planning and land use regulations, labor market institutions, and corporate laws and regulations—play an important role in enhancing the productivity of service industries. Please note that these findings are subject to some reservations because available statistical data on service industries are still limited. This, however, means that this area of research has ample room for further development.

As the author, I hope that this book will serve as a useful reference for those involved in economic policy making and business management, and that more studies will be carried out by interested researchers to deepen further and expand the analysis of service industries.