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

Alwyn Young

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: 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.

JEL-codes: J1 N0 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2013-10
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