Abstract: Factors misallocation caused by the factor distortions in service industry is a significant phenomenon in the development process of China’s service industry, but it has been ignored by many researchers by a long time. The empirical results show that the misallocation extent of labor is larger than capital. There are significant regional differences about the factors misallocation types and extent in the service industry. The estimation results about output losses show that, during the year 2004-2010, factors misallocation lead to the output losses about 9% to 11% in service industry and the output losses are gradually increasing. As the factors misallocation’s contribution to the local output losses in service industry, eastern is lager than central and western. The labor factor’s contribution to the output losses in services is larger than the capital factor’s in all the three regions.