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Structural transformation, the mismeasurement of productivity growth and the cost disease of services

  • Alwyn Young
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    If workers self-select into sectors based upon their relative productivity in different tasks, and comparative advantage is aligned with absolute advantage, then as a sector's employment share increases (decreases) the average efficacy of its workforce will fall (rise). This provides a potential explanation for the differential in the measured productivity growth of contracting goods and expanding services. Using changes in defense expenditures as an exogenous shifter of employment shares, I estimate that the elasticity of worker efficacy with respect to employment shares is substantially negative. While conventional estimates indicate that productivity growth in goods is .8% and 1.4% faster than in services in the US and the OECD, respectively, regression point estimates suggest that the true difference might lie between a .5 percent advantage for goods and a .4 percent advantage for services. Taking the middle of this range, the view that goods and services have similar productivity growth rates provides a plausible alternative characterization of growth in developed economies.

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    File URL: http://eprints.lse.ac.uk/54247/
    File Function: Open access version.
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    Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 54247.

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    Length: 63 pages
    Date of creation: Oct 2013
    Date of revision:
    Handle: RePEc:ehl:lserod:54247
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    Web page: http://www.lse.ac.uk/

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