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High Employment with Low Productivity? The Service Sector as a Determinant of Economic Development

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Abstract

Whether measured in terms of employment or value added, the service sector by far dominates the economies of industrialized countries. The positive connection between tertiarization and per capita income is confirmed in both country cross-section and time series analyses. This development can be explained by demand factors (e.g. the growing proportion of female employees) and supply factors (e.g. cost disease in the service sector). This paper analyzes data on 23 service activities, grouped into four subsectors (distribution, business, social and personal services). The analysis of each subsector's contribution to the development of employment and productivity between 1983 and 2003 illuminates the prevailing productivity gap between the EU-15 and the U.S.A. The corresponding investigation of four new EU Member States during their transformation processes points to an employment potential in the tertiary sector that has not yet been fully utilized. The study further identifies four tertiarization models (dynamic, lagging, managed and catching-up) that can be associated with different geographic regions. The process of tertiarization is compatible with growth in both employment and productivity. Different combinations of production- and consumption-oriented services can have a positive effect on growth. The concluding section discusses the role of the European Union's Lisbon strategy in enhancing the productivity of the service sector.

Suggested Citation

  • Andreas Breitenfellner & Antje Hildebrandt, 2006. "High Employment with Low Productivity? The Service Sector as a Determinant of Economic Development," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 110-135.
    • Handle: RePEc:onb:oenbmp:y:2006:i:1:b:5
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    Cited by:

    1. Beyza Sümer, 2008. "Inflows and Outflows of Services in the EU and Turkey," Papers of the Annual IUE-SUNY Cortland Conference in Economics, in: Oguz Esen & Ayla Ogus (ed.), Proceedings of the Conference on Emerging Economic Issues in a Globalizing World, pages 143-154, Izmir University of Economics.
    2. Sepp, Jüri, 2009. "Industriestruktur als Ursache für Produktivitätsunterschiede in Europa: Das Beispiel Estland," Discussion Papers 1/09, Europa-Kolleg Hamburg, Institute for European Integration.
    3. Maria Tsiapa, 2023. "A holistic approach of the labour productivity slowdown in the regions of the European Union," Papers in Regional Science, Wiley Blackwell, vol. 102(3), pages 507-531, June.
    4. Čapkovičová, Andrea & Hlavsa, Tomáš, 2015. "Approaching the service-based economy: regionally differentiated employment growth in Czechia," Studies in Agricultural Economics, Research Institute for Agricultural Economics, vol. 117(01), pages 1-10, April.
    5. Sultan, Muyed, 2008. "The Tertiary Sector Is Going to Dominate the World Economy; Should We Worry?," MPRA Paper 14681, University Library of Munich, Germany.
    6. Yupeng Li & Kul Prasad Kapri, 2021. "Impact of Economic Factors and Policy Interventions on the COVID-19 Pandemic," Sustainability, MDPI, vol. 13(22), pages 1-18, November.

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    JEL classification:

    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries
    • F15 - International Economics - - Trade - - - Economic Integration
    • L80 - Industrial Organization - - Industry Studies: Services - - - General
    • P20 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - General

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