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Modelling the service sector

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  • King, Philip
  • Millard, Stephen

Abstract

In the wake of the financial crisis output fell dramatically while inflation remained above its target and productivity collapsed relative to its previous trend. The fall in productivity relative to trend was particularly pronounced within the service sector, and then most particularly in certain subsectors such as ‘Professional, Scientific and Technical Activities’. Given the weight of services in the economy – 75% in GDP and 50% in the CPI – it would seem that understanding how this sector works is crucial if we are to understand how the economy as a whole responds to shocks. But our standard macroeconomic models are not well suited to analysing this sector. In this paper, we try to address these deficiencies by modelling better the service sector and then examine the implications of trying to take certain features of the service sector into account. In order to do this, we first embarked on a series of structured visits to a set of firms that span the service sector. The motivation for doing this was that we could use our findings from these visits to get a better feel for how service-sector firms operate and, so, to be able to construct a model of a ‘typical’ service-sector firm. We then build a model taking into account what we learned from the visits and examined the effects of demand shocks within the model. We find that the model can explain some of the qualitative movements in productivity seen in response to the financial crisis.

Suggested Citation

  • King, Philip & Millard, Stephen, 2014. "Modelling the service sector," LSE Research Online Documents on Economics 58234, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:58234
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    File URL: http://eprints.lse.ac.uk/58234/
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    References listed on IDEAS

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    Cited by:

    1. Barnett, Alina & Batten, Sandra & Chiu, Adrian & Franklin, Jeremy & Sebastia-Barriel, Maria, 2014. "The UK productivity puzzle," Bank of England Quarterly Bulletin, Bank of England, vol. 54(2), pages 114-128.

    More about this item

    Keywords

    service sector; intangible investment;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production

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