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.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: structural change, services, Baumol's cost disease, aggregate productivity.
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General > E01 - Measurement and Data on National Income and Product Accounts and Wealth ; Environmental Accounts; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O41 - One, Two, and Multisector Growth Models; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O57 - Comparative Studies of Countries

References

Alder, S., Boppart, T. and Muller, A. (2019) A theory of structural change that can fit the data. Working paper.

Baqaee, D.R. and Farhi, E. (2018) The Macroeconomic impact of microeconomic shocks: beyond Hultens theorem. Working paper.

Barany, Z. and Siegel, C. (2019). Engines of sectoral labor productivity growth. Working paper.

Baumol, W.J. (1967) Macroeconomics of unbalanced growth: the anatomy of urban crisis. American Economic Review 57(3): 415-426.

Bloom, N., Sadun, R., and van Reenen, J. (2012) Americans do it better: US multinationals and the productivity miracle. American Economic Review 102(1): 167-201.

Boppart, T. (2014) Structural change and the Kaldor facts in a growth model with relative price effects and non-Gorman preferences. Econometrica 82(6): 2167-2196.

Bostanci (2019) Intellectual property rights, professional business services and earnings in- equality. Working paper.

Buera, F. J., Kaboski J.P., Rogerson R., and Vizcaino, J.I. (2018) Skill biased structural change. Working paper.

Buiatti, C., Duarte, J.B. and Saenz L.F. (2018) Why is Europe falling behind? Structural transformation and services' productivity differences between Europe and the US. Working Paper.

Comin, D., Lashkari, D. and Mestieri, M. (2018) Structural change with long-run income and price effects. Working paper.

Duarte, M. and Restuccia, D. (2010) The role of the structural transformation in aggregate productivity. The Quarterly Journal of Economics 125(1): 129-173.

Duarte, M. and Restuccia, D. (2019) Relative prices and sectoral productivity. Journal of the European Economic Association 17: 1-44.

Duernecker, G., Herrendorf, B. and Valentinyi, A. (2019) Structural change within the service sector and the future of Baumol's disease. Working paper.

Garcia-Santana, M., Pijoan-Mas, J. and Villacorta, L. (2016) Investment demand and struc- tural change. Working paper.

Grobovsek, J. (2018) Development accounting with intermediate goods. The BE Journal of Macroeconomics 18, 1-27.

Guner, N., Ventura, G. and Xu, Y. (2008) Macroeconomic implications of size dependent policies. Review of Economic Dynamics 11: 721-744.

Hartwig, J. (2011) Testing the Baumol-Nordhaus model with EU KLEMS Data. Review of Income and Wealth 57 (3): 471-489.

Herrendorf, B., Rogerson, R. and Valentinyi, A. (2013) Two perspectives on preferences and structural transformation. American Economic Review 103(7): 2752-2789.

Herrendorf, B., Rogerson, R. and Valentinyi, A. (2014) Growth and structural transforma- tion. In Handbook of Economic Growth, 2, 855-941.

Herrendorf, B., Rogerson, R. and Valentinyi, A. (2018) Structrual change in investment and consumption: a unified approach. Working paper.

Imbs, J. (2014) Structural change in the OECD: some facts. In L. Fontagne and A. Harrison (eds.), The Factory Free Economy: Outsourcing, Servitization, and the Future of Industry (pp. 86110). Oxford: Oxford University Press.

Inklaar, R., Timmer M. P. , and Van Ark, B. (2008) Market services productivity across Europe and the US. Economic Policy, 23(53), 150-194.

Jorgenson, D.W. and Timmer, M.P. (2011) Structural change in advanced nations: a new set of stylised facts. The Scandinavian Journal of Economics 113(1): 1-29.

Koh, D., Santaeulalia-Llopis, R. and Zheng, Y. (2016) Labor share decline and intellectual property products capital. Working paper.

Kuznets, S. (1971) Economic Growth of Nations: Total Output and Production Structure, Harvard University Press, Cambridge, MA.

Maddison, A. (1980), Economic Growth and Structural Change in Advanced Countries, in I. Levenson and J. Wheeler (eds.), Western Economies in Transition: Structural Change and Adjustment Policies in Industrial Countries,Westview Press, Boulder, CO, 41-60.

Miranda-Pinto, J. and Young, E.R. (2019), Flexibility and frictions in multisector models. Working paper.

Moro, A. and Rachedi, O. (2018) The Changing structure of government consumption spend- ing. Working paper.

Ngai, R. and Pissarides C. A. (2007) Structural change in a multisector model of growth. American Economic Review, 97(1), 429-43.

Nordhaus, W. (2008) Baumol's disease: a macroeconomic perspective. The B.E. Journal of Macroeconomics (Contributions), 2008: 8.

Oulton, N. (2001) Must the growth rate decline? Baumol's unbalanced growth revisited. Oxford Economic Papers 53: 605-627.

Samaniego, R., and Sun, J. (2016) Productivity growth and structural transformation. Review of Economic Dynamics 21, 266-85.

Sen, A. (2019) Structural change within the services sector: a supply-side view. Working paper.

Serrano-Quintero, R. (2020) Structural transformation in India: The role of the service sector. Working paper.