The productivity shock in business services

Plain English Summary Professional services suffered in many European countries over almost two decades a dramatic decline in productivity of up to 40 percent. Our research adds a new piece to understanding the puzzling slowdown of the overall productivity growth. The productivity losses of professional services, a sector dominated by micro and small firms, reached between 1995 and 2014 up to 40 percent in several European economies, while this industry shows at the same time a substantial growth of almost 50 percent in the number of persons employed since the millennium. This study examines several possible explanations for the productivity losses. About half of the decline can be attributed to changes in the value chain. Another small part is due to the increase of part-time employment. Against expectations, the massive influx of new firms, which are mostly micro and small firms, is not at the core of the problem. We also find no evidence for a weakening of competitive pressure. In Germany, the productivity of professional services, a sector dominated by SME, declined by 40 percent between 1995 and 2014. Similar developments can be observed in several other European economies. Using a German dataset with 700,000 firm-level observations, we analyze this largely undiscovered phenomenon in professional services, the fourth largest sector of the business economy in the EU-15, which provides important inputs to the economy and has experienced substantial growth in both output and employment since the turn of the millennium. We find that changes in the value chain explain about half of the decline and that increases in part-time employment account for another small part. Contrary to expectations, the entry of micro and small firms is not responsible for the decline, despite their lower productivity levels. Further, we cannot confirm the conjecture that weakening competition has led to an increase in the number of unproductive firms remaining in the markets and that this has led to a lower average productivity.

Automated summary

Professional services in many European countries have experienced a 40% decline in productivity over the past two decades. This study finds that changes in the value chain and an increase in part-time employment contribute to this decline. Contrary to expectations, the entry of micro and small firms does not negatively impact productivity.