Economic Transformation in U.S. Services Driven by Technology

Despite Hsieh and Rossi-Hansberg's assertion that many productivity gains remain unreflected in official statistics, the documented increase in service productivity is notable. From 2000 to 2024, labor productivity in the U.S. experienced an average annual growth rate of 3% in food service, 2.1% in accommodation services, 2.9% in retail trade, and 4.4% in wholesale trade. In contrast, manufacturing productivity growth has stagnated at just 0.2% per year, highlighting the extraordinary performance of the service sector.

This unexpected productivity surge is beneficial, considering that the conventional belief is that services typically hinder overall economic productivity—a theory known as Baumol’s cost disease. Nevertheless, as services now represent a significant portion of economic activity and employment, enhancing productivity is crucial for transforming precarious service jobs into more stable employment opportunities.

This revolution in services is also observed globally, with evidence suggesting it has reached developing nations. While discussions of economic growth often focus on tradable, skill-intensive sectors like IT and finance, these areas are often unsuitable for low-income contexts, as they absorb only a small fraction of the labor force, similar to the limitations faced by manufacturing.

Current growth is occurring in less prominent but essential sectors such as restaurants, delivery services, ride-hailing, grocery retail, and gig work. Research indicates that the growth of middle-class services has been a key driver of economic development in regions like India, Sub-Saharan Africa, and Latin America.

In India, advancements in IT and outsourcing have indeed benefited skilled graduates, but the broader workforce has primarily found opportunities in consumer services within local markets, as noted by Yale economists Tianyu Fan, Michael Peters, and Fabrizio Zilibotti. Additionally, a November 2025 report from the International Monetary Fund highlights that the marginal productivity of labor in India's service sector has surpassed that of manufacturing, suggesting that shifting workers from manufacturing to services could boost national income.

Although manufacturing may not create direct employment opportunities, it can influence the economy through its connections and technological spillovers. However, the current structure of global value chains often limits these benefits due to reliance on imported intermediate goods.

In contrast, modern service industries can foster significant interconnections. For instance, discount retail chains frequently emphasize local goods, creating strong supplier networks that stimulate technological advancements and compliance with quality standards. In Colombia, retailers such as D1 and Ara have built partnerships with numerous local suppliers in the food and grocery sectors, enhancing formal employment in both manufacturing and agriculture.

Research from Victo Silva, a visiting researcher at Harvard, reveals similar trends in Brazil’s food delivery sector. The platform iFood, which partners with 400,000 restaurants, not only delivers food but also offers valuable resources that enhance productivity throughout the sector.

While the potential for productivity gains within labor-intensive services is significant, there is a risk that these benefits may be primarily captured by employers, especially larger firms with considerable market power. Instances in the U.S. where workers in platforms like Uber and Amazon have not seen commensurate improvements in wages despite productivity increases exemplify this concern.

To ensure equitable sharing of productivity gains, corporate accountability is essential. Robust competition policies, regulation, and empowering worker voices will be critical in the service sector, just as they were historically in manufacturing. If the productivity revolution in services can be sustained, it may help both developed and developing nations avoid the trade-off between raising labor standards and overall employment.