The Productivity Deficit of the Knowledge-Intensive Business Service Industries in Switzerland

The knowledge-intensive business service (KIBS) industries of the Swiss economy have been characterized by negative average labour productivity growth over an extended period of time. This finding is puzzling for a number of reasons. First, a long-run decline in productivity among market-oriented industries would imply an increasingly inefficient allocation of resources. Second, these industries typically have high levels of innovation and make intensive use of information technology. One would therefore expect that technological progress should be visible in terms of positive labour productivity growth. Third, the skill intensity and the average wages of workers have increased more than on average. Given these empirical facts, this paper investigates if and to what extent the apparent weakness in productivity is attributable to measurement error in the data. This paper demonstrates that the labour productivity data for the Swiss KIBS industries is prone to mismeasurement because inappropriate deflators are used in the conversion of nominal value added to real value added. First, an empirical analysis of productivity-related indicators does not support a persistent long-term decline of labour productivity as suggested by the data. Second, we apply a number of alternative deflators to the data to assess the impact of the wage-based deflators on labour productivity growth in the Swiss KIBS industries. On the level of the overall KIBS industries, the alternative deflators raise annual labour productivity growth by 0.3 to 0.4 percentage points but growth rates still remain low when compared to manufacturing and traditional services. Third, we study the quantitative influence of wage-based deflation in KIBS industries on the growth of value added and labour productivity in the overall Swiss business sector. Several experimental calculations suggest that the mismeasurement of prices in KIBS industries underestimates aggregate growth rates by 0.1–0.2 percentage points