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Is Growth Declining in the Service Economy?

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  • Hiroaki Sasaki

Abstract

This study extends Baumol's (1967) two-sector (manufacturing and services) unbalanced growth model to analyze a situation in which, first, services are used for both final consumption and intermediate inputs into manufacturing production, and second, the productivities of the manufacturing and services sectors endogenously evolve. By using this model, we examine the conditions under which the employment share of services increases over time and investigate how the economic growth rate evolves as a result. Our results are summarized as follows. First, if the human capital accumulation function exhibits constant returns to scale with respect to per capita consumption of services, then we obtain a U-shaped relationship between the employment share of services and the economic growth rate. Second, if the human capital accumulation function exhibits decreasing returns to scale with respect to per capita consumption of services, the economic growth rate decreases first, begins to increase after some time, again decreases, and finally, approaches zero.

Suggested Citation

  • Hiroaki Sasaki, 2014. "Is Growth Declining in the Service Economy?," Discussion papers e-14-007, Graduate School of Economics Project Center, Kyoto University.
  • Handle: RePEc:kue:dpaper:e-14-007
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    References listed on IDEAS

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    More about this item

    Keywords

    service economy; economic growth; endogenous productivity growth; business services;

    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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