A recent study by economists Chang-Tai Hsieh and Esteban Rossi-Hansberg highlights a significant transformation underway in the services sector, driven by digital technologies and organizational innovations. Their 2023 research, focusing on the United States, identifies a notable increase in productivity across various service industries—including retail, hospitality, personal services, and medical care—marking what they term an "industrial revolution in services."
Between 2000 and 2024, labor productivity in US service sectors experienced robust annual growth rates: 3 percent in food service establishments, 2.1 percent in accommodation services, 2.9 percent in retail trade, and 4.4 percent in wholesale trade. These figures stand in sharp contrast to manufacturing, where productivity growth has largely stagnated at around 0.2 percent annually.
The transformation is not limited to the United States. Researchers observe similar trends emerging globally, including in developing regions such as India, sub-Saharan Africa, and Latin America. Here, the expansion of middle-class services—such as restaurants, deliveries, ride-hailing, grocery stores, gig work, and caregiving—has become an important contributor to economic growth.
This shift contrasts with traditional economic development models that prioritize manufacturing and high-skill, tradable service industries like information technology and financial services. While these sectors have limitations in terms of large-scale labor absorption in low-income contexts, the growing prominence of labor-intensive service industries offers new opportunities for economic development and employment creation.
Recent unpublished research by Victor Silva, a visiting scholar at Harvard’s Center for International Development, provides a case study from Brazil’s food delivery market. The platform iFood, which connects 400,000 restaurants of varying sizes, not only facilitates meal deliveries but also supplies financial, logistical, customer service, and market analysis tools. This support enables productivity improvements throughout the broader food service sector.
Despite the clear potential for productivity gains in labor-absorbing services, concerns remain over the distribution of benefits. Large service chains and digital platforms often wield substantial market power over employees, customers, and suppliers, raising questions about wage growth and working conditions. In the United States, for example, workers such as Uber drivers and Amazon warehouse employees have not seen corresponding improvements in labor terms despite the sector’s productivity advances—a situation reminiscent of the early stages of manufacturing industrialization.
Experts argue that for productivity gains to translate into broadly shared benefits, stronger regulatory frameworks, competition policies, and worker representation are crucial. Without these counterbalances, efforts to raise labor standards could inadvertently hinder employment growth. Nonetheless, should the services sector sustain its productivity momentum, it may offer both developed and developing countries a pathway to economic progress that avoids historic tradeoffs between employment and labor conditions.