Service-Manufacturing Integration and the “Baumol’s Disease” Trap: Experience from China and Global Patterns

The slow relative productivity growth in the service sector is at the heart of “Baumol’s disease”, and the integration of services and manufacturing may offer a critical pathway to address this issue. This paper uses China’s tax survey data and OECD-ICIO input-output tables to examine how service inputs enhance the relative productivity of Chinese service firms and help overcome the “Baumol’s disease” trap. Additionally, it validates global patterns of this phenomenon through cross-country data. The results indicate that (1) increasing service sector input to the manufacturing sector improves the relative productivity of the service sector, narrows the wage cost gap between the two industries, and facilitates the crossing of the “Baumol’s disease” trap; (2) service sector input into high-tech manufacturing and into the manufacturing sector in developed countries is particularly effective in overcoming the “Baumol’s disease” trap, with producer services playing a significant role; (3) service sector input into manufacturing enhances competition, scale, and innovation within the service sector, which is vital for improving its relative productivity; and (4) cross-country data support the conclusion that service sector input into manufacturing can enhance the relative productivity of the service sector, establishing a global framework for overcoming the “Baumol’s disease” trap.