Improving service sector productivity through digitisation.
Australia’s economy, like that of almost all other rich countries, is increasingly dominated by its service sector. If Australians are to experience ongoing wage and productivity growth, it will have to come largely from service industries, which account for 90 per cent of Australian employment and 80 per cent of output.
Slowing productivity and wage growth is a source of concern across the developed world, which has only been amplified by the economic challenges imposed by the COVID-19 pandemic.
According to Australia’s Productivity Commission’s report Things you can’t drop on your feet: an overview of Australia’s services sector productivity sheds light on the evolution of the services sector in Australia, busts some common misconceptions about services, and highlights the challenges associated with services productivity measurement and growth.
Digitisation is increasingly being used to overcome barriers to improvements in service sector productivity.
Technology is enabling services to be provided remotely, accelerated by forced changes during the COVID-19 pandemic. For example, increasingly, doctors are providing telehealth consulting, restaurants are joining online delivery platforms and office workers are using flexible work arrangements.
These are the sorts of technological innovations that increase household and firm choice, driving productivity and quality-of-life improvements.
Digital delivery of services increases the size of a firm’s market, reduces both delivery costs (in some cases to zero) and the cost of obtaining information (‘search costs’). This opens a firm’s market to more than its immediate geography. For example, high quality video calls negate the need to fly to another city to visit an architect. Another example of this is that the digital delivery of business services has facilitated the widespread uptake of firms outsourcing such activities overseas (for example payroll or travel and expense management) (Abramovsky and Griffith 2006; Abramovsky, Griffith and Sako 2004).
Increased access and a larger market have the potential to increase competitive pressures on firms. However, online presence may give rise to ‘superstar’ effects (a few large firms supplying a large proportion of the market) if consumers have similar preferences. This could be a persistent issue in markets with large network effects, as network effects create significant barriers to entry (Goldmanis et al. 2010).
