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Structural change within the services sector, Baumol's cost disease, and cross-country productivity differences

Sen, Ali (2020): Structural change within the services sector, Baumol's cost disease, and cross-country productivity differences.

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Abstract

I analyze structural change within the services sector and its implications for Baumol's cost disease and cross-country productivity differences. My results show that Baumol's cost disease becomes less relevant over development: It generates minor declines on aggregate productivity growth rate and accounts for a small share of the productivity growth slow- down. I argue that the existence of services sub-sectors with high-productivity growth rates, progressive services, and their substitutability with other sectors in the economy rationalize these facts. A model consistent with these stylized facts predict that Baumol's cost disease would depress aggregate productivity growth rate less in the future for developed countries. I later analyze cross-country productivity differences. The results in Duarte and Restuccia (2010) hide discrepancies between different services sub-sectors: Although developed countries have caught-up the US in the low-productivity growth services sub-sectors, stagnant services, the opposite conclusions emerge for the progressive/business services. I conclude that the substitutability between progressive/business and stagnant services sectors contribute to increasing aggregate productivity differences between the US and other developed countries. To put differently, structural change facts that limit Baumol's cost disease also advance cross-country productivity differences.

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