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The Rise of the Service Economy

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  • Francisco J. Buera
  • Joseph P. Kaboski

Abstract

This paper models the relationship between product cycles, specialized capital, specialized skill, and non-homothetic preferences in the shift in production toward services over time. We explicitly model the decision of whether to produce services at home (using manufacturing goods as inputs) or in the market. Market production benefits from increasing returns in the use of specialized capital and skilled labor, but involves a utility cost due to join joint consumption. As the productivity grows, individual services follow a product cycle of moving from market services to home production as the costs of capital fall relative to the utility cost of joint consumption. Skill-intensive services follow this cycle more slowly and non-homothetic preferences increase demand for skill-intensive services over time, which drives a shift toward market services. The model predicts an increase in the share of services, the share of services produced by skilled labor, the level of skill, the return to skill, and the fraction of market services consumed by high income workers

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 496.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:496

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Web page: http://www.EconomicDynamics.org/society.htm
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Related research

Keywords: Structural Chance; Service Economy;

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References

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  1. de Vries, Jan, 1994. "The Industrial Revolution and the Industrious Revolution," The Journal of Economic History, Cambridge University Press, vol. 54(02), pages 249-270, June.
  2. George J. Stigler, 1956. "Trends in Employment in the Service Industries," NBER Books, National Bureau of Economic Research, Inc, number stig56-1.
  3. Ngai, Liwa Rachel & Pissarides, Christopher, 2004. "Structural Change in a Multi-Sector Model of Growth," CEPR Discussion Papers 4763, C.E.P.R. Discussion Papers.
  4. Victor R. Fuchs, 1968. "The Service Economy," NBER Books, National Bureau of Economic Research, Inc, number fuch68-1.
  5. Katz, Lawrence F & Murphy, Kevin M, 1992. "Changes in Relative Wages, 1963-1987: Supply and Demand Factors," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 35-78, February.
  6. Katouzian, M A, 1970. "The Development of the Service Sector: A New Approach," Oxford Economic Papers, Oxford University Press, vol. 22(3), pages 362-82, November.
  7. Zvi Griliches, 1992. "Output Measurement in the Service Sectors," NBER Books, National Bureau of Economic Research, Inc, number gril92-1.
  8. Gary S. Becker & Kevin M. Murphy, 2007. "Education and Consumption: The Effects of Education in the Household Compared to the Marketplace," Journal of Human Capital, University of Chicago Press, vol. 1(1), pages 9-35.
  9. Zvi Griliches, 1992. "Introduction to "Output Measurement in the Service Sectors"," NBER Chapters, in: Output Measurement in the Service Sectors, pages 1-22 National Bureau of Economic Research, Inc.
  10. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-42, June.
  11. Jess Benhabib & Richard Rogerson & Randall Wright, 1991. "Homework in macroeconomics: household production and aggregate fluctuations," Staff Report 135, Federal Reserve Bank of Minneapolis.
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