This paper studies productivity in Latin America and the Caribbean, with an emphasis on the service sector. It shows that the low levels of productivity observed in the region are not only a consequence of low productivity at the firm level, but also of misallocation of workers across firms. These problems are more severe in services than in manufacturing. We also found that the determinants of productivity and employment growth at the firm level are different in manufacturing and services. Furthermore, results suggest that institutional factors might be important for determining productivity growth and resource allocation, as there are large differences across countries in the region in the effect of productivity on employment growth as well as on the speed at which less productive firms can close their productivity gaps.