Although service activities across a variety of industries suffer from Baumol’s cost disease, arguably advances in IT can help to overcome some of the regressive characteristics of “stagnant” services. To test this conjecture, we collected longitudinal data from 1985 to 2008 on about 60 micro-level service activities at the Social Security Administration (SSA), one of the largest service organizations in the world that touches lives of 162 million Americans and about 94% of all workers in the United States. We find that IT labor has a positive association with productivity in service activities in the government sector, and the effect of IT labor on service productivity exceeds that of non-IT labor. IT labor has higher impact on service productivity for services that require higher customer contact and customization. The evidence in this study points to an important role of IT in enabling higher productivity even in stagnant services, suggesting that IT can help to overcome Baumol’s cost disease. Our findings also suggest that managers need to invest in IT human capital and change management efforts to deploy the right types of IT systems to meet rising demand for services and higher productivity.