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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 6: Productivity trends and employment across industries in Canada

Pierre Mohnen and Thijs ten Raa


Pierre Mohnen and Thijs ten Raa1 1 INTRODUCTION In a famous article of 1967, William Baumol predicted that services would price themselves out of the market, given their lower productivity growth and the consequent rise of their relative price, compared to non-service goods. Twenty years later, we observe that measured productivity growth in services is indeed relatively low, but that at the same time the modern economy is based less on manufacturing and more on service. Economic activity has substantially shifted away from manufacturing towards services, as it had moved from the primary sector to manufacturing in the first half of the last century. How to reconcile these observations? In this chapter we examine the apparent paradox in the light of the Canadian experience. We first look at the facts. In section 2, we trace productivity trends and employment shifts for the Canadian economy over the period 1962–91. Second, we review a list of potential explanations. Labour productivity growth provides only a partial picture of productivity performance since it ignores the role of capital accumulation, so we look at total factor productivity growth. In section 3, we distinguish between value-added and final demand. Their macro identity breaks down at the sectoral level and this has implications on the issue. Value-added might be more concentrated in services than before, reflecting a crowding-out of services from manufacturing, and yet final demand composition has barely changed. We then examine shifts in final demand composition at both the commodity and final demand...

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