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The Growth of Service Industries

The Paradox of Exploding Costs and Persistent Demand

Edited by Thijs ten Raa and Ronald Schettkat

Problems arise if budgets for services are held constant whilst prices rise. Education, cultural activities and health services are under constant budgetary pressure. The authors argue that the price of commodities is linked to demand and price increases would therefore seem to threaten the very existence of these services. The paradox of these services is that in spite of their exploding costs, demand persists.
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Chapter 5: Will the new information economy cure the cost disease in the USA?

Joe P. Mattey


1 Joe P. Mattey INTRODUCTION As in other industrial countries, the sectoral structure of employment and nominal output in the USA has changed noticeably over the last several decades, and the nation appears to have ‘fallen ill’ with a ‘cost disease’ in the service sector. Productivity growth in the service sector has been quite weak, boosting production costs and prices of services. Despite this, the service sector’s share of real output has trended upward, and the service sector’s share of employment and nominal output has increased even faster. This chapter considers various possible explanations for the puzzle of why the US service sector has remained quite viable in terms of output shares – despite rapid increases in relative prices. The chapter focuses, in particular, on the possible past and future role of the growth in the information-orientedness of the economy in providing the ‘cure’ to the cost disease. The next section of this chapter provides some of the basic statistics on the structure of employment, output, costs, and prices in the USA, thereby identifying the extent to which symptoms of the ‘cost disease’ have been present. The third section reviews various other potential explanations of the maintenance of real service sector shares that have been offered in the literature. The fourth and final section of the chapter turns to the issue of how the increasing information-orientedness of the economy might be affecting these trends. EVIDENCE OF THE COST DISEASE IN THE USA Sectoral Labour Productivity, Costs, and Prices More than thirty...

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