Companies in the US service sector are second to none. American retailers, banks, airlines, package shippers, restaurants, and hotels lead the world in productivity. They constantly innovate to attract customers. Over the past decade, they have generated tremendous wealth and created thousands of jobs. Yet this formidable record could be jeopardized by a shortage of the one thing every service business needs: employees.

Labor markets in the United States are extremely tight. Nationwide, unemployment stands at about 4.5 percent; in Atlanta, Chicago, San Francisco, and Orlando, the figure is even lower. While this state of affairs affects all employers, it puts particular pressure on service companies, since they have traditionally paid the least and attracted workers who had relatively few options. What’s more, the tightness will persist. The US Bureau of Labor Statistics estimates that the total labor force in 2005 will be between 143 and 153 million people, and the number of jobs will be between 140 and 150 million.

As a result, business models based on a steady supply of cheap labor will increasingly flounder as they fail to find people capable of executing them. To continue to grow in such an environment, service companies will need...