THE PRODUCTIVITY SLOWDOWN - IS A GROWING UNMEASURABLE SECTOR THE CULPRIT

The productivity slowdown of the early 1970s continues to puzzle econo mists. A frequent explanation of this puzzle is that mismeasurement of output has worsened enough to help account for the apparent shortfall of output growth. Griliches (1994) highlighted one channel through wh ich this worsening measurement could occur. He raised the possibility that-because output growth in the service sector likely is undermeasur ed-the rising share of services has led to greater undermeasurement of overall economic growth. This paper demonstrates that this argument i s of little quantitative significance. Even under assumptions most fav orable to the hypothesis, the rising share of services has had only a small impact on measurement error. These results-along with evidence f rom Baily and Gordon (1988)-make mismeasurement of output an improbabl e explanation for the productivity slowdown in aggregate data.