The productivity slowdown: Is a growing unmeasurable sector the culprit?

The productivity slowdown of the early 1970s continues to puzzle economists. 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 which this worsening measurement could occur. He raised the possibility that-because output growth in the service sector likely is undermeasured-the rising share of services has led to greater undermeasurement of overall economic growth. This paper demonstrates that this argument is of little quantitative significance. Even under assumptions most favorable to the hypothesis, the rising share of services has had only a small impact on measurement error. These results-along with evidence from Baily and Gordon (1988)-make mismeasurement of output an improbable explanation for the productivity slowdown in aggregate data.