Whereas United States economic productivity grew at an annual rate of 3 percent from 1945 to 1965, it has grown at an annual rate of only about 1 percent since the early 1970's. What might be preventing higher productivity growth? Clearly, the manufacturing sector of the economy cannot be blamed. Since 1980, productivity improvements in manufacturing have moved the United States from a position of acute decline in manufacturing to one of world prominence. Manufacturing, however, constitutes a relatively small proportion of the economy. In 1992, goods-producing businesses employed only 19.1 percent of American workers, whereas service-producing businesses employed 70 percent. Although the service sector has grown since the late 1970's, its productivity growth has declined.

Several explanations have been offered for this decline and for the discrepancy in productivity growth between the manufacturing and service sectors. One is that traditional measures fail to reflect service-sector productivity growth because it has been concentrated in improved quality of services. Yet traditional measures of manufacturing productivity have shown significant increases despite the undermeasurement of quality, whereas service productivity has continued to stagnate. Others argue that since the 1970's, manufacturing workers, faced with strong foreign competition, have learned to work more efficiently in order to keep their jobs in the United States, but service workers, who are typically under less global competitive pressure, have not. However, the pressure on manufacturing workers in the United States to work more efficiently has generally been overstated, often for political reasons. In fact, while some manufacturing jobs have been lost due to foreign competition, many more have been lost simply because of slow growth in demand for manufactured goods.

Yet another explanation blames the federal budget deficit: if it were lower, interest rates would be lower too, thereby increasing investment in the development of new technologies, which would spur productivity growth in the service sector. There is, however, no dearth of technological resources; rather, managers in the service sector fail to take advantage of widely available skills and machines. High productivity growth levels attained by leading- edge service companies indicate that service-sector managers who wisely implement available technology and choose skillful workers can significantly improve their companies' productivity. The culprits for service-sector productivity stagnation are the forces-such as corporate takeovers and unnecessary governmental regulation-that distract managers from the task of making optimal use of available resources.