Productivity Commission: rise of the service sector poses policy challenges

By Shannon Jenkins

Thursday April 15, 2021

Services employ almost 90% of Australian workers and account for around 80% of GDP. (Image: Adobe: fizkes)

The continuous growth of Australia’s service sector presents a number of challenges for policymakers, according to the Productivity Commission’s new report on services sector productivity.

The paper, launched on Thursday, found that services employ almost 90% of Australian workers and account for around 80% of GDP.

As Australia’s economy is increasingly dominated by the service sector, wage and productivity growth will need to come largely from service industries, the PC said.

“Although the goods sector, including mining, will continue to be of economic importance, as Australia continues to become a more service-centric economy, long-run wages and national welfare will be increasingly linked to service-sector productivity,” it said.

The commission has argued that ongoing growth of the service sector presents a set of challenges and opportunities for Australia, including designing appropriate regulatory frameworks in response to novel business structures as they emerge, and measuring changes in service sector productivity.

Differences in industry and regulation structure mean that a “cookie cutter approach to policymaking” may not be appropriate for many service industries, the report noted.

“Although some policy areas have economy-wide implications (such as industrial relations and taxation), reform of many service sector industries demands a more bespoke approach, requiring detailed knowledge of the industry’s structure and regulatory environment,” it said.

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Australia’s shift towards service production over the past 70 years, and away from manufacturing in particular, has raised concerns about worsening labour market conditions, slower wage growth and slower productivity growth.

But the PC has said these fears are “misplaced” for a number of reasons, including that “a large service sector is a feature of a mature and prosperous economy”. The paper noted that almost all advanced economies, including China, have experienced rapid growth in their service sector and a shrinking of their manufacturing sector.

The commission has pointed out that services employees are paid more on average per hour than manufacturing workers, and overall, the rise in casualised employment has been on par with the goods sector. However, there are characteristics of some services that can limit scope for their productivity growth.

“Many services are delivered face-to-face, improved business practices can be harder to implement and the quality of a service can be difficult to establish before purchase,” the PC said.

According to the report, digitisation and technological developments can be used to overcome barriers to improvements in service sector productivity.

“For example, online learning increases access to, and competition within, education as well as increasing the scope for capital deepening and economies of scale,” it said.

“Likewise, digitisation of other services can lower search costs and asymmetries of information, further increasing competitive pressures and allowing greater diffusion of technology between firms.”

Further, the COVID-19 pandemic saw technology being utilised to allow many services to be delivered remotely.

But technological innovation can pose numerous policy challenges, the PC has found. For example, social media creates privacy issues, and crypto currencies have security implications. The commission has warned that when policy could do “more harm than good” if it tries to respond to these challenges in a way that “hinders innovation”.

“This would likely be the case if, for example, governments attempted to ban social media and crypto currencies altogether,” it said.

“How policymakers balance the need to address the legitimate challenges posed by technological change with the desire to not hinder the innovation process will be a key theme in the service sector for the decades to come.”

As the “issues affecting the service sector are as diverse as the sector itself”, the PC will release further reports analysing individual service industries.

READ MORE: Productivity Commission explains how government can utilise regtech


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