As much to be gained by merchandise as manufacture? The role of services as an engine of growth

Abstract

This article assesses the role of the services sector as an engine of growth during the 1985–2015 period. Results from testing services within a Kaldorian framework support the view that (a) manufacturing continues to remain important, but its contribution has weakened over time while that of services has become stronger, and (b) job creation is being driven predominantly by the services sector in countries at all income levels, although this is not always associated with productivity gains, raising concerns about its sustainability. In addition to the Kaldorian analysis, we use a shift-share decomposition of labor productivity to analyze the 2005–2015 decade for 11 economic activities. We find that the strongest contribution to overall productivity is provided by what we call “modern” services, mostly through labor reallocation from sectors with lower productivity levels. In contrast, the contribution of the manufacturing sector, although still positive, arises from “within”-sector changes in productivity, partially as a consequence of the sector’s lack of job creation. In light of technological change, and the impact it may have on low- and middle-skill jobs, it is likely that the job creating effects of manufacturing may decline further. Modern services—such as business activities and transport and communications, which are linked to manufacturing—appear to have characteristics similar to those of manufacturing, and are becoming important for countries at all income levels for economic growth overall. However, although expanding quickly, their share of total employment remains small.