Does Measuring Service Productivity Lead Us Astray?

In “Japan may be rigid but it is not inefficient,” David Philig takes issue with metrics that find Japan’s service economy to be woefully inefficient. The commonly used yardstick is labor productivity, and Japan allegedly scores badly due to its tendency to have high staff ratios (for instance, those ladies in hotels who walk you to the elevator and bow).

Yet Philig finds that the figures lead to patently nonsensical conclusions, for instance, that Japan’s rail and medical systems are less efficient than those of the US. The article discusses some of the reasons that cross country comparisons are unreliable. I wish the piece had gone into more detail here. because the discussion made it sound as if it was conflating several notions that needed to be picked apart: difficulty in standardizing for quality of output (the extraordinary reliability of Japan’s trains are clearly worth more in a very tangible sense than erratic service elsewhere) and social benefit (having a store within a short walk is a wonderful convenience and saves on gas too).

While academics are likely to focus on trying to find better ways to normalize for the quality of results, the notion of broader benefits, or positive externalities, is largely ignored. And that is a much bigger deal than is commonly acknowledged.

As most businesses know, what gets measured gets attention. Even if management isn’t sure yet whether it matters, if employees learn that the bosses are now clocking, say, the length of their average phone call, it will affect behavior.

Even though positive and negative externalites are well accepted economic concepts, far less effort has gone into trying to measure them than, say, unemployment or poverty. Admittedly, some of these by nature are easier to capture, but how easy is it to measure GDP in the absence of a large data-gathering and statistical apparatus? As our experience with CO2 emissions (and historically, other pollutants) has shown us, negative externalities can literally have global impact, yet they have gotten short shrift since identifying and costing them would no doubt heighten and sharpen some simmering debates. Similarly, failing to capture the benefit of positive externalties can lead to misguided policies. But as in the old joke about the drunk looking for his keys under the street light, most people prefer to look only where it is convenient.

From the Financial Times:

It is the men with red-glowing Darth Vader nightsticks who provoke particular scorn. These are the people, employed by Japanese construction companies, who stand by roadworks or building sites, waving pedestrians and traffic out of harm’s way. So vital is their function that sometimes they are replaced by plastic cut-outs.

Then there are the elevator ladies, with their doll-like mannerisms, who press the lift buttons, the shop assistants who work in pairs, and the hotel attendants with so much time on their hands they physically walk guests to the lavatory or cigar bar.

These are the examples regularly invoked to illustrate Japan’s supposed service-sector failings. While Japanese manufacturing is held up as world class, its service sector, which accounts for 70 per cent of output, is regularly lampooned as being years behind the efficiencies achieved in the US and even sleepy Europe.

The latest Organisation for Economic Co-operation and Development report on Japan, released this month, treads familiar ground. It states that “boosting productivity in the service sector is a key priority for promoting long-term growth” as the workforce ages and shrinks. While manufacturing labour productivity per hour increased from 1999 to 2004 by 4 per cent annually, keeping pace with the US, it notes, service-sector productivity lagged behind badly, rising just 0.9 per cent.

There is a problem with such analysis. You need only to read, in a previous finding, that Japan’s transport system is 30 per cent less efficient than that of the US to smell a rat. Common sense tells you that passenger transport is vastly superior in Japan, where tens of millions of people are moved daily at reasonable cost. The Shinkansen bullet train, for example, with 300 daily services between Tokyo and Osaka, makes the 552km journey in 2½ hours with an average delay measured in seconds.

Japan’s health service is also regularly portrayed as inefficient. Patients languish in hospital beds far longer than they would in the US. Yet, according to government statistics, Japan spends 7.9 per cent of gross domestic product on healthcare against 15.2 per cent in the US. Life expectancy in Japan, admittedly a crude measure of healthcare quality, is 79 for men and 86 for women, respectively four and six years higher than in the US.

Clearly something is wrong with the methodology. Kyoji Fukao, professor at Hitotsubashi University’s Economic Research Institute, thinks so too. The team he heads provides much of the Japanese data that go into international comparisons. He argues that the usual measures of service-sector efficiency – value added per man hour and total factor productivity, which incorporates capital and labour inputs – are crude and hard to compare across borders.

He cites Japan’s retail sector, regularly branded as inefficient. The basic measure of retail-sector productivity is how much of a product an employee can shift in an hour. On this measure, Germany does well. That turns out to be because of restricted opening hours, which oblige customers to make hefty purchases in one go. Japan does badly. Cavernous US superstores do better than cramped noodle or tofu shops. Japan also has a dense network of convenience stores on almost every city block, open 24 hours , allowing people to shop whenever they want. This makes them inefficient, since purchases are less concentrated.

No allowance is made, either, for the fact that Japanese shops tend to be within walking or, at most, cycling distance. Figures do not capture the inconvenience of having to travel, or the externalities associated with long shopping expeditions: traffic accidents, pollution, road maintenance.

To complicate matters further, a European-funded study that compares productivity internationally, called EU KLEMS, throws up odd results. According to data released in March 2007 on productivity in Japan’s wholesale, retail and transport sector, labour productivity grew just 0.5 per cent annually from 1995 to 2004. The same study, released a year later, showed productivity clipping along at 2.1 per cent from 1995 to 2005, considerably better than Europe’s.

This is not to claim that Japan’s service sector is beyond reproach. Labour market rigidities make it harder to shift people from unproductive parts of the economy to more productive ones. Perhaps the men with nightsticks should be working as hospital nurses, who are thin on the ground. When it comes to information technology, US companies change their working practices to fit new computer programmes, often pruning staff in the process. Japanese companies have IT programmes designed to suit existing working practices and employee numbers.

Some Japanese services are too expensive. The tendency to favour producers over consumers damages everybody. High harbour charges have pushed transit freight to cheaper ports in China. Exorbitant airport landing fees make it virtually impossible for low-cost airlines to operate. The fourth most expensive electricity charges among OECD countries raises the cost of doing business.

Japan should tilt the balance back towards consumers by fostering competition, encouraging foreign investment and removing barriers to new entrants. Better, cheaper services could stimulate domestic demand, reducing Japan’s export dependence. All that is true. But it is not the same as making near-meaningless comparisons about productivity. When someone tells you Japan’s transport system is inefficient, think Amtrak.