Does the expansion of the service sector slow down productivity growth? An empirical assessment across eight developed economies

This study examines the impact of the expansion of the service sector on labour productivity growth in eight developed economies, reaching back to the late 1970s. To that end, I develop a shift-share decomposition formula that satisfactorily integrates both Kaldorian and Baumolian effects. Firstly, my decomposition does not assume that productivity growth at the industry level is exogenous but rather incorporates the Verdoorn coefficients that I previously estimated using system GMM. Secondly, consistent with the Baumolian framework, my decomposition includes the impact that arises from the cumulative changes that take place in terms of the nominal value added and employment shares. My results show that, on average, tertiarisation only slows down productivity growth in three economies, where labour shifts away from industries with increasing returns. However, the cumulative reallocation of employment and nominal output leads to a gradual decrease in the productivity growth rate in seven of the eight economies.