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

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.

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Article provided by Oesterreichische Nationalbank (Austrian Central Bank) in its journal Monetary Policy & the Economy.

Volume (Year): (2006)
Issue (Month): 1 ()
Pages: 110–135

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Handle: RePEc:onb:oenbmp:y:2006:i:1:b:5
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  1. Robert J. Gordon, 1996. "Problems in the Measurement and Performance of Service-Sector Productivity in the United States," NBER Working Papers 5519, National Bureau of Economic Research, Inc.
  2. Robert Stehrer, 2005. "Employment, Education and Occupation Structures: A Framework for Forecasting," wiiw Research Reports 315, The Vienna Institute for International Economic Studies, wiiw.
  3. Gilbert Cette & Christian Pfister, 2004. "Challenges of the “New Economy” for Monetary Policy," International Productivity Monitor, Centre for the Study of Living Standards, vol. 8, pages 27-36, Spring.
  4. Bénédicte Vidaillet & V. D'Estaintot & P. Abécassis, 2005. "Introduction," Post-Print hal-00287137, HAL.
  5. Richard Rogerson, 2006. "Structural Transformation and the Labor Market," 2006 Meeting Papers 256, Society for Economic Dynamics.
  6. Schettkat, Ronald & Yocarini, Lara, 2003. "The Shift to Services: A Review of the Literature," IZA Discussion Papers 964, Institute for the Study of Labor (IZA).
  7. Baumol, William J, 1972. "Macroeconomics of Unbalanced Growth: Reply," American Economic Review, American Economic Association, vol. 62(1), pages 150, March.
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