Conventional explanations for lagging U.S. service sector productivity focus on the difficulties of measuring service output, a lack of sufficient competition in service industries, and poor management skills. Drawing on data collected in 95 service establishments in the banking and hotel industries in the U.S., UK, and Germany, this article suggests an alternative explanation. U.S. service companies may effectively be achieving low levels of labor productivity by design. The U.S. service establishments in this study are productivity leaders in low value-added market segments but productivity laggards in higher value-added market segments. They have consciously chosen to adjust the labor intensity of service delivery to the business potential of different customer segments. Varying the design of service processes by customer segment has lowered measured productivity levels but may be supporting higher levels of business performance.
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