Selection, Structural Transformation, and the Cost Disease of Services

Martin Shu

American Economic Journal: Macroeconomics, 2026, vol. 18, issue 3, 343-78

Abstract: Labor productivity growth in the service sector may be mismeasured if workers with heterogeneous skills self-select into sectors. I document with US data that workers reallocated from manufacturing earn more than incumbent workers in professional services but less than incumbent workers in education, health, and public services. A generalized quantitative Roy model predicts a selection effect on labor productivity growth in professional services that is 10 percentage points higher than what a conventional selection model predicts. Overall, the selection effect contributes little to the cost disease of services, which contrasts sharply with the hypothesis in the literature.

JEL-codes: E24 J24 J31 J44 J45 L60 L80 (search for similar items in EconPapers)
Date: 2026
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DOI: 10.1257/mac.20230241

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