Commission: productivity of service sector too low

A lack of competition, government regulation and a low level of education may all have contributed to the poor productivity levels in the domestic service sector, according to a new report

The productivity of the nation's service sector is too low, according to a report from the government’s productivity commission, Produktivitetskommissionen.

The commission was established to examine why the productivity of Danish businesses is improving at half the annual rate of other European countries. There has been 0.8 percent growth in Denmark compared to an average 1.6 percent in Holland, Germany and Sweden between 1995 and 2010.

While the productivity of Danish businesses that operate internationally grew annually by 2.4 percent, businesses that focussed on the domestic market actually reduced by 0.3 percent a year between 1995 and 2010.

“The weak development of productivity in the service sector is the main reason that Denmark has fallen behind countries such as the US and leading European countries,” Peter Birch Sørensen, chairman of the Produktivitetskommissionen, said in a press release. “Increased productivity in the service sector will both benefit consumers and our international competitiveness.”

The report identifies supermarkets, taxis, legal services and the catering industry as areas that have failed to keep up with leading economies at improving service efficiency by producing more with less.

The commission identified three possible reasons for why the productivity of these industries is improving at a slower rate.

First are rules and regulations that restrict how businesses can operate. Regulations, such as those limiting the maximum size of supermarkets, often prevent businesses from finding cheaper ways of operating.

Second is a lack of competition in the small Danish domestic market. High levels of competition produce an incentive for businesses to improve their efficiency as they attempt to provide cheaper products than their competitors – without this competition, there is less incentive.

The final explanation was that those employed in Danish service industries tend to have a lower level of education compared to more productive countries – only 23 percent of those employed in the service industries completed a higher education, compared to 34 percent in the US.

“If the share of higher educated employees in the Danish service sector was raised to the same level as in the US, productivity in the service sector would increase by about ten percent,” Sørensen wrote.

The commission will release another report in the summer with specific proposals for improving Denmark’s productivity.