In recent decades, most of the national economies have experienced a similar trend of growth in service sector. In economic literature service sector growth can be rooted in two distinct phenomena: knowledge-based economy or premature deindustrialization. This paper seeks to investigate the nature of service sector growth based on its effect on total factor productivity (TFP) in Iran. In particular, Kalman filter approach is used to estimate this effect. Service sector valued added and share of employment are used as the two separate proxies for service sector size in order to improve robustness of the results. Empirical results show that service sector growth did not increase overall productivity over the period of 1975-2015. Consequently, service sector growth in Iran did not root in knowledge-based economy and the whole progress could be considered as premature deindustrialization.