Skills, Education and Productivity in the Service Sector - Firm Level Evidence on the Presence of Externalities

Increased productivity is one of the main drivers of economic growth. Considering the increasing importance of the service sector in many economies studies of productivity in service firms are essential, but still rare. Questions concerning the underlying reasons for productivity differences in service firms are therefore important. Why is the productivity in certain firms higher than in others and what are the possibilities for less-productive firms to increase their productivity levels? This paper aims to examine these issues with a particular focus on the importance of externalities. Externalities are defined as region-specific economic effects influencing firm efficiency. These externalities can be broadly divided in the following categories: i) urbanization economies which relate to diversity and density (Jacobs externalities), ii) localization economies which concern specialization and concentration (MAR externalities), iii) competition (Porter externalities), and iv) labor market externalities. The purpose of the paper is to explain the productivity levels of Swedish service firms using measures of these externalities. However, also firm specific characteristics, including characteristics of the workforce, are included. These are used both as control variables and to capture potential spillover effects that indirectly affect productivity through the employees. The characteristics of the workforce are essential to include since the employees have the potential to affect the way different firms absorb and use possible spillover effects. They are therefore a crucial component to channel externalities to the firm as a whole. This is the case especially for service firms since these are generally very labor intensive. The results of this study should be of interest to policy makers since they have the possibility to make decisions that contribute to more productive regional environments. This is also of interest to company leaders since they have the possibility to decide where to locate and how to structure their firms in order to take advantage of productivity enhancing externalities.