Recent studies stress the importance of service industries on a country's economic growth performance. Amid a decreasing labor force due to population aging, productivity growth of industries, especially service industries, is a focus of economic policy in Japan. Recently, the Service Productivity and Innovation for Growth (SPRING) a business-government-academia forum and the Service Engineering Research Center were established to enhance service sector innovation and productivity. However, analysis of productivity in service industries using microdata lags far behind that of the manufacturing industry, for which solid and reliable data are available.
The purpose of this paper is to document evidence on the relationship between short-term demand fluctuations and the total factor productivity (TFP) of service industries. Specifically, by using unique establishment-level data on six personal-service industries, in which the simultaneity of production and consumption is especially prominent, this paper estimates production functions for narrowly defined service industries in Japan.
In many personal-service industries including restaurants, hotels, passenger transportation, and amusement services, demand fluctuates daily, weekly, and seasonally. On the other hand, capital and labor inputs cannot be adjusted immediately. As a result, service industries' productivity is heavily affected by short-term fluctuations in demand because the output cannot be stored. This is different from the manufacturing industry, where inventory can be used as a buffer to smooth production.
Several time-series analyses have shown that the relationship between measured TFP and the business cycle is stronger for service industries (Basu et al., 2006; Inklaar, 2007; Kawamoto, 2005; Miyagawa et al., 2006). This issue is closely related to the adjustment costs of labor and capital, as many studies have indicated significant factor adjustment costs and their negative effects on productivity (see, for example, Hamermesh and Pfann, 1996; Groth, 2008). Although it is somewhat related to these studies, the focus of this paper is the effects of very short-term variability of demand on the establishment-level TFP.
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Demand Fluctuations and Productivity of Service Industries
